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Old 03-06-2012, 12:10 AM
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Convert primary to rental property /capital gains?

I convert my primary residence I've lived in for 10 years to rental property and then sell two years after conversion for $600,000. Paid $300,000 and that includes improvements.. Depreciated $40,000 over the two year rental period. I'm assuming my basis for the gain is now $260,000. Correct? That would give me a capital gain of $340,000. If married my exclusion would be $500,000 so I would pay no tax on this sale. I think I've got it right but I'm really concerned about the depreciation. Does this mean that all my deprecation never gets added back in any way because I've done this on a rental property that was previously a primary residence and I've met the lived in two of the past 5 year rule?



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Old 03-06-2012, 03:04 AM
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I convert my primary residence I've lived in for 10 years to rental property and then sell two years after conversion for $600,000. Paid $300,000 and that includes improvements.. Depreciated $40,000 over the two year rental period. I'm assuming my basis for the gain is now $260,000. Correct? “---->Your adj basis is $260,000;$300K-$40K
“That would give me a capital gain of $340,000. If married my exclusion would be $500,000 so I would pay no tax on this sale. I think I've got it right but I'm really concerned about the depreciation.”---->Correct;in general, you will have to pay taxes on the property when you sell it through Depreciation Recapture.
“Does this mean that all my deprecation never gets added back in any way because I've done this on a rental property that was previously a primary residence and I've met the lived in two of the past 5 year rule?”---> You can only exclude capital gains (not depreciation recapture) from your taxable income when you sell the pty as your primary residence that was also held as a rental property. The depreciation recapture would be recognized in the year the primary residence is sold even if you qualify for the 121 exclusion providing that property held and used by you as your primary residence for at least 24 months out of the last 60 months can be sold and you can exclude from your taxable income up to $250,000.00 in capital gains if you are single (per homeowner/person) and up to $500,000.00 in capital gains for a married couple filing a joint income tax return.



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Old 03-06-2012, 01:07 PM
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Thank you. One more detail I have a concern about. Can I still exclude 500,000 of gains if the property is held by me as the sole owner as long as I am married and file a joint tax return.



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Old 03-06-2012, 03:45 PM
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“Can I still exclude 500,000 of gains if the property is held by me as the sole owner as long as I am married and file a joint tax return?”----> So, you lived in your home as a primary residence more than two years( for 10 years in your case as you said “I convert my primary residence I've lived in for 10 years to rental property and then sell two years after conversion for $600,000.”), but decided to move out and turned the property into rental housing. If you sell the property less than three years after you moved out, you still qualify for that primary residence exemption of $250,000 or $500,000. To use the $500,000 exclusion,EITHER spouse owned the residence and you must file a joint return. At least one spouse must meet the ownership requirement, and both you and your spouse must have lived in the house for two of the five years leading up to the sale.



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Old 03-06-2012, 04:03 PM
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Interesting. Looks like you've opened the door to another question. You say "both you and your spouse must have lived in the house for two of the five years leading up to the sale." At the time of sale, let's say in two more years, we sell the property and are married and file a joint tax return at that time. She lived with me in the house for two of the past five years leading up to the sale but was not my spouse at that time. So she is my spouse at time of sale but not my spouse during those two years. Do we still qualify for $500,000 exclusion?



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Old 03-06-2012, 05:12 PM
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“At the time of sale, let's say in two more years, we sell the property and are married and file a joint tax return at that time. She lived with me in the house for two of the past five years leading up to the sale but was not my spouse at that time. So she is my spouse at time of sale but not my spouse during those two years. Do we still qualify for $500,000 exclusion?”----> A new marriage may also double the tax break in some circumstances. Suppose you sold your principal residence on June, 1 and gained $500,000 in profits. Let's also say that you and your girlfriend had been living in the house for two years (but h only your name was on the title), so you both satisfy the use test. If you get married by midnight Dec. 31 of the same year, you can file a joint return for that year and exclude the entire $500,000.



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Old 03-06-2012, 07:46 PM
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That sounds similar to what I am saying but I'm a little confused. It's about the use test. It appears that you are saying that the use test does not necessarily say the property must be used by a spouse. She can be my girlfriend during the use period and my spouse at year of sale. That as long as we are married and file a joint return in the year of sale we qualify for $500K exclusion. Is this correct?



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Old 03-06-2012, 08:00 PM
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“ It appears that you are saying that the use test does not necessarily say the property must be used by a spouse. She can be my girlfriend during the use period and my spouse at year of sale. That as long as we are married and file a joint return in the year of sale we qualify for $500K exclusion. Is this correct?”-->Correct.



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