CPA advice needed for selling two homes in 2019

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Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

CPA advice needed for selling two homes in 2019

Post by tbini87 » Wed May 15, 2019 2:33 pm

Hello all,
My family has recently run into an odd situation that involves possibly selling two homes this year. I’ll try to give the pertinent details below, and I am ultimately looking for tax advice. I am married filing jointly, and we live in CA. Household income around $90k. We may have a recent opportunity to move closer to family, which would be the reason for selling our current primary residence.

We sold a rental home in April 2019 which was exempt from capital gains tax due to living in it as our primary until November 2017. We received approximately $155k from the sale.

We bought our current primary residence in November 2017 and have lived in it since then. We bought it for $375k, and could sell it for approximately $500k. We added solar and concrete work and did some interior upgrades. When I looked into selling the home, I learned that I could not exempt it from taxes due to having exempted a different house within 2 years.

In trying to run the numbers myself it seems as though I can reduce our taxable proceeds by the amount of home upgrades we have done and the amount of commissions we pay upon the sale. For example, if we sold for $500k and we paid $375k, our profit would be $125k. We could then subtract commissions paid ($30k) and home improvements ($20k)... and would pay taxes on $75k.

CA would tax the Profit at around 10%, and capital gains around 15%, so I would pay approximately 25% taxes on the $75k?

Are those numbers about right? Are there any other considerations I could have missed. We did get a tax refund for the solar panels last year on taxes, so would I not get to deduct that amount again when changing the cost basis of the home? Any advice and help would be appreciated, I am fairly new to investing and absolutely novice when it comes to taxes. Thanks in advance.

trueblueky
Posts: 1463
Joined: Tue May 27, 2014 3:50 pm

Re: CPA advice needed for selling two homes in 2019

Post by trueblueky » Wed May 15, 2019 3:01 pm

tbini87 wrote:
Wed May 15, 2019 2:33 pm
Hello all,
My family has recently run into an odd situation that involves possibly selling two homes this year. I’ll try to give the pertinent details below, and I am ultimately looking for tax advice. I am married filing jointly, and we live in CA. Household income around $90k. We may have a recent opportunity to move closer to family, which would be the reason for selling our current primary residence.

We sold a rental home in April 2019 which was exempt from capital gains tax due to living in it as our primary until November 2017. We received approximately $155k from the sale.
Have you accounted for the depreciation allowed or allowable on the rental? See IRS Pub 523. There are great worksheets there.

https://www.irs.gov/publications/p523#e ... k100010759
We bought our current primary residence in November 2017 and have lived in it since then. We bought it for $375k, and could sell it for approximately $500k. We added solar and concrete work and did some interior upgrades. When I looked into selling the home, I learned that I could not exempt it from taxes due to having exempted a different house within 2 years.

In trying to run the numbers myself it seems as though I can reduce our taxable proceeds by the amount of home upgrades we have done and the amount of commissions we pay upon the sale. For example, if we sold for $500k and we paid $375k, our profit would be $125k. We could then subtract commissions paid ($30k) and home improvements ($20k)... and would pay taxes on $75k.

CA would tax the Profit at around 10%, and capital gains around 15%, so I would pay approximately 25% taxes on the $75k?

Are those numbers about right? Are there any other considerations I could have missed. We did get a tax refund for the solar panels last year on taxes, so would I not get to deduct that amount again when changing the cost basis of the home? Any advice and help would be appreciated, I am fairly new to investing and absolutely novice when it comes to taxes. Thanks in advance.

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Wed May 15, 2019 4:15 pm

trueblueky wrote:
Wed May 15, 2019 3:01 pm
tbini87 wrote:
Wed May 15, 2019 2:33 pm
Hello all,
My family has recently run into an odd situation that involves possibly selling two homes this year. I’ll try to give the pertinent details below, and I am ultimately looking for tax advice. I am married filing jointly, and we live in CA. Household income around $90k. We may have a recent opportunity to move closer to family, which would be the reason for selling our current primary residence.

We sold a rental home in April 2019 which was exempt from capital gains tax due to living in it as our primary until November 2017. We received approximately $155k from the sale.
Have you accounted for the depreciation allowed or allowable on the rental? See IRS Pub 523. There are great worksheets there.

https://www.irs.gov/publications/p523#e ... k100010759
We bought our current primary residence in November 2017 and have lived in it since then. We bought it for $375k, and could sell it for approximately $500k. We added solar and concrete work and did some interior upgrades. When I looked into selling the home, I learned that I could not exempt it from taxes due to having exempted a different house within 2 years.

In trying to run the numbers myself it seems as though I can reduce our taxable proceeds by the amount of home upgrades we have done and the amount of commissions we pay upon the sale. For example, if we sold for $500k and we paid $375k, our profit would be $125k. We could then subtract commissions paid ($30k) and home improvements ($20k)... and would pay taxes on $75k.

CA would tax the Profit at around 10%, and capital gains around 15%, so I would pay approximately 25% taxes on the $75k?

Are those numbers about right? Are there any other considerations I could have missed. We did get a tax refund for the solar panels last year on taxes, so would I not get to deduct that amount again when changing the cost basis of the home? Any advice and help would be appreciated, I am fairly new to investing and absolutely novice when it comes to taxes. Thanks in advance.
I have not accounted for depreciation. From reading there it appeared that that may only apply if the rental was used as a business or rental for two of the last five years. We used it as a rental for approximately 18 months total prior to selling.

CMD1
Posts: 61
Joined: Tue Nov 28, 2017 8:10 pm

Re: CPA advice needed for selling two homes in 2019

Post by CMD1 » Wed May 15, 2019 4:39 pm

Generally you are always required to pay recapture on the depreciation, even if you didn't actually take it when it was a rental. That said, if it was a rental for 18 months 1-2 years of recapture shouldn't be big enough to drive your decision, it might add a little to your tax bill however. Someone else may be able to confirm if, because you meet the 2 of the last 5 years rule, your able to somehow avoid any depreciation recapture.... I've never heard of such a thing.

trueblueky
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Joined: Tue May 27, 2014 3:50 pm

Re: CPA advice needed for selling two homes in 2019

Post by trueblueky » Wed May 15, 2019 4:53 pm

Use Worksheet 3, Pub 523.

Since you are selling both houses in 2019, you might run the numbers for electing the first house as the one to take the exclusion vs. electing the second one (would need to live there until November to meet the two-year requirement, unless you qualify for an exception).

Any tax break you received from the solar installation lowers your basis. That should not make a difference here.

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celia
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Re: CPA advice needed for selling two homes in 2019

Post by celia » Wed May 15, 2019 4:55 pm

tbini87 wrote:
Wed May 15, 2019 2:33 pm
CA would tax the Profit at around 10%, and capital gains around 15%, so I would pay approximately 25% taxes on the $75k?
The $75K would appear to me to be taxed as ordinary income. You don't qualify for LT Capital Gains on the house since you didn't own it at least a year. So look at last year's tax bracket for federal and state to see what tax brackets would apply to you, although $75K might push you into the next bracket. Even if it does, only the amount that is over the top of your current bracket will be taxed in the next bracket.

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Wed May 15, 2019 5:00 pm

celia wrote:
Wed May 15, 2019 4:55 pm
tbini87 wrote:
Wed May 15, 2019 2:33 pm
CA would tax the Profit at around 10%, and capital gains around 15%, so I would pay approximately 25% taxes on the $75k?
The $75K would appear to me to be taxed as ordinary income. You don't qualify for LT Capital Gains on the house since you didn't own it at least a year. So look at last year's tax bracket for federal and state to see what tax brackets would apply to you, although $75K might push you into the next bracket. Even if it does, only the amount that is over the top of your current bracket will be taxed in the next bracket.
We purchased our current primary residence in Nov 2017, so we have owned it more than a year. We would have to keep it as our primary through November of this year, then rent it out til May 2021 to be fully exempt again.

MrBobcat
Posts: 57
Joined: Fri Jan 11, 2019 5:19 pm

Re: CPA advice needed for selling two homes in 2019

Post by MrBobcat » Wed May 15, 2019 5:06 pm

tbini87 wrote:
Wed May 15, 2019 5:00 pm
celia wrote:
Wed May 15, 2019 4:55 pm
tbini87 wrote:
Wed May 15, 2019 2:33 pm
CA would tax the Profit at around 10%, and capital gains around 15%, so I would pay approximately 25% taxes on the $75k?
The $75K would appear to me to be taxed as ordinary income. You don't qualify for LT Capital Gains on the house since you didn't own it at least a year. So look at last year's tax bracket for federal and state to see what tax brackets would apply to you, although $75K might push you into the next bracket. Even if it does, only the amount that is over the top of your current bracket will be taxed in the next bracket.
We purchased our current primary residence in Nov 2017, so we have owned it more than a year. We would have to keep it as our primary through November of this year, then rent it out til May 2021 to be fully exempt again.
No. You would have converted it to investment property (by renting for 2 plus years) and it wouldn't qualify for the residence deduction. Short term renting while actively trying to sell normally won't convert a principal residence to investment property but the intent has to be to mitigate the costs while actively trying to sell.

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Wed May 15, 2019 5:36 pm

MrBobcat wrote:
Wed May 15, 2019 5:06 pm
tbini87 wrote:
Wed May 15, 2019 5:00 pm
celia wrote:
Wed May 15, 2019 4:55 pm
tbini87 wrote:
Wed May 15, 2019 2:33 pm
CA would tax the Profit at around 10%, and capital gains around 15%, so I would pay approximately 25% taxes on the $75k?
The $75K would appear to me to be taxed as ordinary income. You don't qualify for LT Capital Gains on the house since you didn't own it at least a year. So look at last year's tax bracket for federal and state to see what tax brackets would apply to you, although $75K might push you into the next bracket. Even if it does, only the amount that is over the top of your current bracket will be taxed in the next bracket.
We purchased our current primary residence in Nov 2017, so we have owned it more than a year. We would have to keep it as our primary through November of this year, then rent it out til May 2021 to be fully exempt again.
No. You would have converted it to investment property (by renting for 2 plus years) and it wouldn't qualify for the residence deduction. Short term renting while actively trying to sell normally won't convert a principal residence to investment property but the intent has to be to mitigate the costs while actively trying to sell.
If we have lived in it as our primary for two of the last five years wouldn’t we be eligible for cap gains tax exemption just like we were when we sold the rental we just sold?

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Wed May 15, 2019 5:37 pm

trueblueky wrote:
Wed May 15, 2019 4:53 pm
Use Worksheet 3, Pub 523.

Since you are selling both houses in 2019, you might run the numbers for electing the first house as the one to take the exclusion vs. electing the second one (would need to live there until November to meet the two-year requirement, unless you qualify for an exception).

Any tax break you received from the solar installation lowers your basis. That should not make a difference here.
We already sold the first house and used the exemption in the first one.

trueblueky
Posts: 1463
Joined: Tue May 27, 2014 3:50 pm

Re: CPA advice needed for selling two homes in 2019

Post by trueblueky » Wed May 15, 2019 6:27 pm

tbini87 wrote:
Wed May 15, 2019 5:37 pm
trueblueky wrote:
Wed May 15, 2019 4:53 pm
Use Worksheet 3, Pub 523.

Since you are selling both houses in 2019, you might run the numbers for electing the first house as the one to take the exclusion vs. electing the second one (would need to live there until November to meet the two-year requirement, unless you qualify for an exception).

Any tax break you received from the solar installation lowers your basis. That should not make a difference here.
We already sold the first house and used the exemption in the first one.
Until you file your federal taxes in 2020, you will not have made an election on whether to use the exclusion on the rental house you sold in April 2019.

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Wed May 15, 2019 6:47 pm

trueblueky wrote:
Wed May 15, 2019 6:27 pm
tbini87 wrote:
Wed May 15, 2019 5:37 pm
trueblueky wrote:
Wed May 15, 2019 4:53 pm
Use Worksheet 3, Pub 523.

Since you are selling both houses in 2019, you might run the numbers for electing the first house as the one to take the exclusion vs. electing the second one (would need to live there until November to meet the two-year requirement, unless you qualify for an exception).

Any tax break you received from the solar installation lowers your basis. That should not make a difference here.
We already sold the first house and used the exemption in the first one.
Until you file your federal taxes in 2020, you will not have made an election on whether to use the exclusion on the rental house you sold in April 2019.
Very good, I wasn’t lying about being new to this tax stuff haha. We received the proceeds with no taxes withheld I guess which made me think we had already used the exclusion.

trueblueky
Posts: 1463
Joined: Tue May 27, 2014 3:50 pm

Re: CPA advice needed for selling two homes in 2019

Post by trueblueky » Wed May 15, 2019 6:59 pm

Two documents will help you. HUD-1 is the settlement sheet that shows how much seller and buyer each contributed to the various closing costs.

You may also receive a 1099-S from the real estate broker (maybe soon after closing, maybe in January, maybe not at all - this doesn't seem to be very standard, in my experience). A copy of the 1099-R goes to the IRS as well. No withholding, just reporting.

MrBobcat
Posts: 57
Joined: Fri Jan 11, 2019 5:19 pm

Re: CPA advice needed for selling two homes in 2019

Post by MrBobcat » Wed May 15, 2019 9:25 pm

tbini87 wrote:
Wed May 15, 2019 5:36 pm
MrBobcat wrote:
Wed May 15, 2019 5:06 pm
tbini87 wrote:
Wed May 15, 2019 5:00 pm
celia wrote:
Wed May 15, 2019 4:55 pm
tbini87 wrote:
Wed May 15, 2019 2:33 pm
CA would tax the Profit at around 10%, and capital gains around 15%, so I would pay approximately 25% taxes on the $75k?
The $75K would appear to me to be taxed as ordinary income. You don't qualify for LT Capital Gains on the house since you didn't own it at least a year. So look at last year's tax bracket for federal and state to see what tax brackets would apply to you, although $75K might push you into the next bracket. Even if it does, only the amount that is over the top of your current bracket will be taxed in the next bracket.
We purchased our current primary residence in Nov 2017, so we have owned it more than a year. We would have to keep it as our primary through November of this year, then rent it out til May 2021 to be fully exempt again.
No. You would have converted it to investment property (by renting for 2 plus years) and it wouldn't qualify for the residence deduction. Short term renting while actively trying to sell normally won't convert a principal residence to investment property but the intent has to be to mitigate the costs while actively trying to sell.
If we have lived in it as our primary for two of the last five years wouldn’t we be eligible for cap gains tax exemption just like we were when we sold the rental we just sold?
2 in the last 5 years just works for residences. If you converted the property to investment/rental (other than incidental to a sale) then no, it doesn't qualify.

This would have been one of the questions on your certification form that the title co had you fill out to determine if it was your residence in order to not get a 1099-S issued. If you marked it false, the title co would have been required to report the sale to the IRS as it wouldn't have qualified as a principal residence.

"(3) I (or my spouse or former spouse, if I was married at any time during the period beginning after May 6, 1997, and ending today) have not used any portion of the residence for business or rental purposes after May 6, 1997."

Good news is you haven't filed your 2019 return yet.

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Wed May 15, 2019 10:12 pm

MrBobcat wrote:
Wed May 15, 2019 9:25 pm
tbini87 wrote:
Wed May 15, 2019 5:36 pm
MrBobcat wrote:
Wed May 15, 2019 5:06 pm
tbini87 wrote:
Wed May 15, 2019 5:00 pm
celia wrote:
Wed May 15, 2019 4:55 pm

The $75K would appear to me to be taxed as ordinary income. You don't qualify for LT Capital Gains on the house since you didn't own it at least a year. So look at last year's tax bracket for federal and state to see what tax brackets would apply to you, although $75K might push you into the next bracket. Even if it does, only the amount that is over the top of your current bracket will be taxed in the next bracket.
We purchased our current primary residence in Nov 2017, so we have owned it more than a year. We would have to keep it as our primary through November of this year, then rent it out til May 2021 to be fully exempt again.
No. You would have converted it to investment property (by renting for 2 plus years) and it wouldn't qualify for the residence deduction. Short term renting while actively trying to sell normally won't convert a principal residence to investment property but the intent has to be to mitigate the costs while actively trying to sell.
If we have lived in it as our primary for two of the last five years wouldn’t we be eligible for cap gains tax exemption just like we were when we sold the rental we just sold?
2 in the last 5 years just works for residences. If you converted the property to investment/rental (other than incidental to a sale) then no, it doesn't qualify.

This would have been one of the questions on your certification form that the title co had you fill out to determine if it was your residence in order to not get a 1099-S issued. If you marked it false, the title co would have been required to report the sale to the IRS as it wouldn't have qualified as a principal residence.

"(3) I (or my spouse or former spouse, if I was married at any time during the period beginning after May 6, 1997, and ending today) have not used any portion of the residence for business or rental purposes after May 6, 1997."

Good news is you haven't filed your 2019 return yet.
That was not my understanding at all. It was explained to me that it is exempt due to the 2 out of 5 year rule, meaning we lived in it as our primary for at least 2 of the last 5 years of owning it. Regardless of if we lived in it for 2 then rented it for 2 or rented it for 2 then lived in it for 2.

https://www.thebalance.com/sale-of-your-home-3193496

MarkNYC
Posts: 1490
Joined: Mon May 05, 2008 7:58 pm

Re: CPA advice needed for selling two homes in 2019

Post by MarkNYC » Wed May 15, 2019 10:38 pm

MrBobcat wrote:
Wed May 15, 2019 5:06 pm
tbini87 wrote:
Wed May 15, 2019 5:00 pm
celia wrote:
Wed May 15, 2019 4:55 pm
tbini87 wrote:
Wed May 15, 2019 2:33 pm
CA would tax the Profit at around 10%, and capital gains around 15%, so I would pay approximately 25% taxes on the $75k?
The $75K would appear to me to be taxed as ordinary income. You don't qualify for LT Capital Gains on the house since you didn't own it at least a year. So look at last year's tax bracket for federal and state to see what tax brackets would apply to you, although $75K might push you into the next bracket. Even if it does, only the amount that is over the top of your current bracket will be taxed in the next bracket.
We purchased our current primary residence in Nov 2017, so we have owned it more than a year. We would have to keep it as our primary through November of this year, then rent it out til May 2021 to be fully exempt again.
No. You would have converted it to investment property (by renting for 2 plus years) and it wouldn't qualify for the residence deduction. Short term renting while actively trying to sell normally won't convert a principal residence to investment property but the intent has to be to mitigate the costs while actively trying to sell.
I disagree. The OP should be entitled to the exclusion, except for the portion of the gain attributable to depreciation. There is nothing in the law requiring a specifc reason for renting a former principal residence in order to preserve the exclusion, as long as the 2 out of 5 year use rule is met. See Treas Reg. 1.121-1(c)(4) Example 1.

MrBobcat
Posts: 57
Joined: Fri Jan 11, 2019 5:19 pm

Re: CPA advice needed for selling two homes in 2019

Post by MrBobcat » Wed May 15, 2019 10:47 pm

tbini87 wrote:
Wed May 15, 2019 10:12 pm
MrBobcat wrote:
Wed May 15, 2019 9:25 pm
tbini87 wrote:
Wed May 15, 2019 5:36 pm
MrBobcat wrote:
Wed May 15, 2019 5:06 pm
tbini87 wrote:
Wed May 15, 2019 5:00 pm


We purchased our current primary residence in Nov 2017, so we have owned it more than a year. We would have to keep it as our primary through November of this year, then rent it out til May 2021 to be fully exempt again.
No. You would have converted it to investment property (by renting for 2 plus years) and it wouldn't qualify for the residence deduction. Short term renting while actively trying to sell normally won't convert a principal residence to investment property but the intent has to be to mitigate the costs while actively trying to sell.
If we have lived in it as our primary for two of the last five years wouldn’t we be eligible for cap gains tax exemption just like we were when we sold the rental we just sold?
2 in the last 5 years just works for residences. If you converted the property to investment/rental (other than incidental to a sale) then no, it doesn't qualify.

This would have been one of the questions on your certification form that the title co had you fill out to determine if it was your residence in order to not get a 1099-S issued. If you marked it false, the title co would have been required to report the sale to the IRS as it wouldn't have qualified as a principal residence.

"(3) I (or my spouse or former spouse, if I was married at any time during the period beginning after May 6, 1997, and ending today) have not used any portion of the residence for business or rental purposes after May 6, 1997."

Good news is you haven't filed your 2019 return yet.
That was not my understanding at all. It was explained to me that it is exempt due to the 2 out of 5 year rule, meaning we lived in it as our primary for at least 2 of the last 5 years of owning it. Regardless of if we lived in it for 2 then rented it for 2 or rented it for 2 then lived in it for 2.

https://www.thebalance.com/sale-of-your-home-3193496
Those are 2 different scenarios. First one you converted a principal residence to a rental property and then sold it... doesn't qualify. 2nd one you converted a rental property to a principal residence, lived in it for the qualified time and then sold it. 2 years is important, but just as important is how the property is classified when you sold it.

Per the article you linked to:

"The exclusion depends on the property being your residence, not an investment property. You must have lived in the home for a minimum of two out of the last five years immediately preceding the date of the sale.

The two years don't have to be consecutive and you don't actually have to live there on the date of the sale. You can live in the home for a year, rent it out for three years, then move back in for 12 months. The IRS figures that if you spent this much time under that roof, the home qualifies as your principal residence."

At any rate I'd recommend you get yourself to a competent CPA when doing your taxes this year. Don't rely on articles on the internet nor free advice from strangers when the tax man is involved. :wink:

MrBobcat
Posts: 57
Joined: Fri Jan 11, 2019 5:19 pm

Re: CPA advice needed for selling two homes in 2019

Post by MrBobcat » Wed May 15, 2019 10:59 pm

MarkNYC wrote:
Wed May 15, 2019 10:38 pm
MrBobcat wrote:
Wed May 15, 2019 5:06 pm
tbini87 wrote:
Wed May 15, 2019 5:00 pm
celia wrote:
Wed May 15, 2019 4:55 pm
tbini87 wrote:
Wed May 15, 2019 2:33 pm
CA would tax the Profit at around 10%, and capital gains around 15%, so I would pay approximately 25% taxes on the $75k?
The $75K would appear to me to be taxed as ordinary income. You don't qualify for LT Capital Gains on the house since you didn't own it at least a year. So look at last year's tax bracket for federal and state to see what tax brackets would apply to you, although $75K might push you into the next bracket. Even if it does, only the amount that is over the top of your current bracket will be taxed in the next bracket.
We purchased our current primary residence in Nov 2017, so we have owned it more than a year. We would have to keep it as our primary through November of this year, then rent it out til May 2021 to be fully exempt again.
No. You would have converted it to investment property (by renting for 2 plus years) and it wouldn't qualify for the residence deduction. Short term renting while actively trying to sell normally won't convert a principal residence to investment property but the intent has to be to mitigate the costs while actively trying to sell.
I disagree. The OP should be entitled to the exclusion, except for the portion of the gain attributable to depreciation. There is nothing in the law requiring a specifc reason for renting a former principal residence in order to preserve the exclusion, as long as the 2 out of 5 year use rule is met. See Treas Reg. 1.121-1(c)(4) Example 1.
It's a facts and circumstances issue as to whether it qualifies as a principal residence which is why I included the exception of renting while trying to sell. It no longer qualifies as a principal residence if one converted the property (in fact) to a rental.

If you read the example in the treas regs you posted, it's 2 residences that the fellow spits time between, one of them is deemed his principal one, the other is just a residence. It does not say anything about either of them being converted to rental property.

But yes, if a principal residence (at time of sale) had ever previously been used for business (home office) or rental purposes there is the depreciation recapture issue that needs dealt with.

Anywho, I given my 2 cents on the topic.

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Wed May 15, 2019 11:08 pm

MrBobcat wrote:
Wed May 15, 2019 10:47 pm
tbini87 wrote:
Wed May 15, 2019 10:12 pm
MrBobcat wrote:
Wed May 15, 2019 9:25 pm
tbini87 wrote:
Wed May 15, 2019 5:36 pm
MrBobcat wrote:
Wed May 15, 2019 5:06 pm


No. You would have converted it to investment property (by renting for 2 plus years) and it wouldn't qualify for the residence deduction. Short term renting while actively trying to sell normally won't convert a principal residence to investment property but the intent has to be to mitigate the costs while actively trying to sell.
If we have lived in it as our primary for two of the last five years wouldn’t we be eligible for cap gains tax exemption just like we were when we sold the rental we just sold?
2 in the last 5 years just works for residences. If you converted the property to investment/rental (other than incidental to a sale) then no, it doesn't qualify.

This would have been one of the questions on your certification form that the title co had you fill out to determine if it was your residence in order to not get a 1099-S issued. If you marked it false, the title co would have been required to report the sale to the IRS as it wouldn't have qualified as a principal residence.

"(3) I (or my spouse or former spouse, if I was married at any time during the period beginning after May 6, 1997, and ending today) have not used any portion of the residence for business or rental purposes after May 6, 1997."

Good news is you haven't filed your 2019 return yet.
That was not my understanding at all. It was explained to me that it is exempt due to the 2 out of 5 year rule, meaning we lived in it as our primary for at least 2 of the last 5 years of owning it. Regardless of if we lived in it for 2 then rented it for 2 or rented it for 2 then lived in it for 2.

https://www.thebalance.com/sale-of-your-home-3193496
Those are 2 different scenarios. First one you converted a principal residence to a rental property and then sold it... doesn't qualify. 2nd one you converted a rental property to a principal residence, lived in it for the qualified time and then sold it. 2 years is important, but just as important is how the property is classified when you sold it.

Per the article you linked to:

"The exclusion depends on the property being your residence, not an investment property. You must have lived in the home for a minimum of two out of the last five years immediately preceding the date of the sale.

The two years don't have to be consecutive and you don't actually have to live there on the date of the sale. You can live in the home for a year, rent it out for three years, then move back in for 12 months. The IRS figures that if you spent this much time under that roof, the home qualifies as your principal residence."

At any rate I'd recommend you get yourself to a competent CPA when doing your taxes this year. Don't rely on articles on the internet nor free advice from strangers when the tax man is involved. :wink:
We always hire a pro which is probably why I’m so clueless about taxes. It is odd that the article says one doesn’t have to be living in the house at the time of sale. So if you lived in it two years, rented it to years, then moved back in for a month then you are good on the exemption?

I guess that if it does not qualify for the exemption it actually makes our scenario much less messy. I will pay capital gains on the sale of the rental and then be able to exempt the current residence? Or at least partially exempt it if I take a new job 600 miles away?

I appreciate your input and insight.

Katietsu
Posts: 1939
Joined: Sun Sep 22, 2013 1:48 am

Re: CPA advice needed for selling two homes in 2019

Post by Katietsu » Wed May 15, 2019 11:12 pm

Read Pub 523. It is pretty easy to understand when it explains who is eligible for the exclusion. And I see no issue if you choose to use the exclusion on the sale of the "rental" house.

The residence part of the requirements is:
From Pub 523...
Determine whether you meet the residence requirement.
If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.
The look back rule is what would prevent you from using the exclusion on both houses.

This is a case, though, where I would not let taxes decide when you want to move or whether or not you want to sell or rent the current home.

MrBobcat
Posts: 57
Joined: Fri Jan 11, 2019 5:19 pm

Re: CPA advice needed for selling two homes in 2019

Post by MrBobcat » Wed May 15, 2019 11:15 pm

tbini87 wrote:
Wed May 15, 2019 11:08 pm
MrBobcat wrote:
Wed May 15, 2019 10:47 pm
tbini87 wrote:
Wed May 15, 2019 10:12 pm
MrBobcat wrote:
Wed May 15, 2019 9:25 pm
tbini87 wrote:
Wed May 15, 2019 5:36 pm


If we have lived in it as our primary for two of the last five years wouldn’t we be eligible for cap gains tax exemption just like we were when we sold the rental we just sold?
2 in the last 5 years just works for residences. If you converted the property to investment/rental (other than incidental to a sale) then no, it doesn't qualify.

This would have been one of the questions on your certification form that the title co had you fill out to determine if it was your residence in order to not get a 1099-S issued. If you marked it false, the title co would have been required to report the sale to the IRS as it wouldn't have qualified as a principal residence.

"(3) I (or my spouse or former spouse, if I was married at any time during the period beginning after May 6, 1997, and ending today) have not used any portion of the residence for business or rental purposes after May 6, 1997."

Good news is you haven't filed your 2019 return yet.
That was not my understanding at all. It was explained to me that it is exempt due to the 2 out of 5 year rule, meaning we lived in it as our primary for at least 2 of the last 5 years of owning it. Regardless of if we lived in it for 2 then rented it for 2 or rented it for 2 then lived in it for 2.

https://www.thebalance.com/sale-of-your-home-3193496
Those are 2 different scenarios. First one you converted a principal residence to a rental property and then sold it... doesn't qualify. 2nd one you converted a rental property to a principal residence, lived in it for the qualified time and then sold it. 2 years is important, but just as important is how the property is classified when you sold it.

Per the article you linked to:

"The exclusion depends on the property being your residence, not an investment property. You must have lived in the home for a minimum of two out of the last five years immediately preceding the date of the sale.

The two years don't have to be consecutive and you don't actually have to live there on the date of the sale. You can live in the home for a year, rent it out for three years, then move back in for 12 months. The IRS figures that if you spent this much time under that roof, the home qualifies as your principal residence."

At any rate I'd recommend you get yourself to a competent CPA when doing your taxes this year. Don't rely on articles on the internet nor free advice from strangers when the tax man is involved. :wink:
We always hire a pro which is probably why I’m so clueless about taxes. It is odd that the article says one doesn’t have to be living in the house at the time of sale. So if you lived in it two years, rented it to years, then moved back in for a month then you are good on the exemption?

I guess that if it does not qualify for the exemption it actually makes our scenario much less messy. I will pay capital gains on the sale of the rental and then be able to exempt the current residence? Or at least partially exempt it if I take a new job 600 miles away?

I appreciate your input and insight.
It's not odd, it's quite common for people to move into their new principal residence while their old one is being sold (and no longer being lived in), which depending on the market could be a while.

As to your question on moving back into it for a month and then selling, it's a facts and circumstances test (ie did you really intend to live there full time and make it a residence)

But yes if you move because of employment (IIRC your new job has to be at least 50 miles from your old principal residence) you can prorate the exemption if you've lived in it less than 2 years.

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Wed May 15, 2019 11:17 pm

Katietsu wrote:
Wed May 15, 2019 11:12 pm
Read Pub 523. It is pretty easy to understand when it explains who is eligible for the exclusion. And I see no issue if you choose to use the exclusion on the sale of the "rental" house.

The residence part of the requirements is:
From Pub 523...
Determine whether you meet the residence requirement.
If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.
The look back rule is what would prevent you from using the exclusion on both houses.

This is a case, though, where I would not let taxes decide when you want to move or whether or not you want to sell or rent the current home.
I recall reading that and signing a paper with title and escrow that had similar verbiage which was why I saw so surprised bobcat said it didn’t, we had spoken to multiple people (no tax pros unfortunately) but multiple real estate agents and investors, and none saw an issue with taking the exemption on our rental house.

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Wed May 15, 2019 11:19 pm

MrBobcat wrote:
Wed May 15, 2019 11:15 pm
tbini87 wrote:
Wed May 15, 2019 11:08 pm
MrBobcat wrote:
Wed May 15, 2019 10:47 pm
tbini87 wrote:
Wed May 15, 2019 10:12 pm
MrBobcat wrote:
Wed May 15, 2019 9:25 pm


2 in the last 5 years just works for residences. If you converted the property to investment/rental (other than incidental to a sale) then no, it doesn't qualify.

This would have been one of the questions on your certification form that the title co had you fill out to determine if it was your residence in order to not get a 1099-S issued. If you marked it false, the title co would have been required to report the sale to the IRS as it wouldn't have qualified as a principal residence.

"(3) I (or my spouse or former spouse, if I was married at any time during the period beginning after May 6, 1997, and ending today) have not used any portion of the residence for business or rental purposes after May 6, 1997."

Good news is you haven't filed your 2019 return yet.
That was not my understanding at all. It was explained to me that it is exempt due to the 2 out of 5 year rule, meaning we lived in it as our primary for at least 2 of the last 5 years of owning it. Regardless of if we lived in it for 2 then rented it for 2 or rented it for 2 then lived in it for 2.

https://www.thebalance.com/sale-of-your-home-3193496
Those are 2 different scenarios. First one you converted a principal residence to a rental property and then sold it... doesn't qualify. 2nd one you converted a rental property to a principal residence, lived in it for the qualified time and then sold it. 2 years is important, but just as important is how the property is classified when you sold it.

Per the article you linked to:

"The exclusion depends on the property being your residence, not an investment property. You must have lived in the home for a minimum of two out of the last five years immediately preceding the date of the sale.

The two years don't have to be consecutive and you don't actually have to live there on the date of the sale. You can live in the home for a year, rent it out for three years, then move back in for 12 months. The IRS figures that if you spent this much time under that roof, the home qualifies as your principal residence."

At any rate I'd recommend you get yourself to a competent CPA when doing your taxes this year. Don't rely on articles on the internet nor free advice from strangers when the tax man is involved. :wink:
We always hire a pro which is probably why I’m so clueless about taxes. It is odd that the article says one doesn’t have to be living in the house at the time of sale. So if you lived in it two years, rented it to years, then moved back in for a month then you are good on the exemption?

I guess that if it does not qualify for the exemption it actually makes our scenario much less messy. I will pay capital gains on the sale of the rental and then be able to exempt the current residence? Or at least partially exempt it if I take a new job 600 miles away?

I appreciate your input and insight.
It's not odd, it's quite common for people to move into their new principal residence while their old one is being sold (and no longer being lived in), which depending on the market could be a while.

As to your question on moving back into it for a month and then selling, it's a facts and circumstances test (ie did you really intend to live there full time and make it a residence)

But yes if you move because of employment (IIRC your new job has to be at least 50 miles from your old principal residence) you can prorate the exemption if you've lived in it less than 2 years.
On the employment exemption it was unclear if the change had to have been forced to qualify. So even if I just choose to take a new job the partial exemption should still qualify? The earliest we would possibly sell would be at least 19 or 20 months in to owning the current primary so not that far from 2 years anyways.

MarkNYC
Posts: 1490
Joined: Mon May 05, 2008 7:58 pm

Re: CPA advice needed for selling two homes in 2019

Post by MarkNYC » Wed May 15, 2019 11:24 pm

MrBobcat wrote:
Wed May 15, 2019 10:59 pm
MarkNYC wrote:
Wed May 15, 2019 10:38 pm
MrBobcat wrote:
Wed May 15, 2019 5:06 pm
tbini87 wrote:
Wed May 15, 2019 5:00 pm
celia wrote:
Wed May 15, 2019 4:55 pm

The $75K would appear to me to be taxed as ordinary income. You don't qualify for LT Capital Gains on the house since you didn't own it at least a year. So look at last year's tax bracket for federal and state to see what tax brackets would apply to you, although $75K might push you into the next bracket. Even if it does, only the amount that is over the top of your current bracket will be taxed in the next bracket.
We purchased our current primary residence in Nov 2017, so we have owned it more than a year. We would have to keep it as our primary through November of this year, then rent it out til May 2021 to be fully exempt again.
No. You would have converted it to investment property (by renting for 2 plus years) and it wouldn't qualify for the residence deduction. Short term renting while actively trying to sell normally won't convert a principal residence to investment property but the intent has to be to mitigate the costs while actively trying to sell.
I disagree. The OP should be entitled to the exclusion, except for the portion of the gain attributable to depreciation. There is nothing in the law requiring a specifc reason for renting a former principal residence in order to preserve the exclusion, as long as the 2 out of 5 year use rule is met. See Treas Reg. 1.121-1(c)(4) Example 1.
It's a facts and circumstances issue as to whether it qualifies as a principal residence which is why I included the exception of renting while trying to sell. It no longer qualifies as a principal residence if one converted the property (in fact) to a rental.

If you read the example in the treas regs you posted, it's 2 residences that the fellow spits time between, one of them is deemed his principal one, the other is just a residence. It does not say anything about either of them being converted to rental property.
You incorrectly read Example 1 in Sec (b)(4). Please read Example 1 in Sec (c)(4) which states:

"Taxpayer A has owned and used his house as his principal residence since 1986. On Jan 1, 1998, A moves to another state. A rents his house to tenants from that date until Apr. 18, 2000, when he sells it. A is eligible for the Sec. 121 exclusion because he has owned and used the house as his principal residence for at least 2 of the 5 years preceding the sale."

MrBobcat
Posts: 57
Joined: Fri Jan 11, 2019 5:19 pm

Re: CPA advice needed for selling two homes in 2019

Post by MrBobcat » Wed May 15, 2019 11:24 pm

tbini87 wrote:
Wed May 15, 2019 11:19 pm
On the employment exemption it was unclear if the change had to have been forced to qualify. So even if I just choose to take a new job the partial exemption should still qualify? The earliest we would possibly sell would be at least 19 or 20 months in to owning the current primary so not that far from 2 years anyways.
No employment change does not have to be forced to qualify, just a change in employment for any reason.

Moves not related to employment don't qualify... so don't live in a house for 23 months, retire, sell it and move closer to the kids.

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Wed May 15, 2019 11:27 pm

MrBobcat wrote:
Wed May 15, 2019 11:24 pm
tbini87 wrote:
Wed May 15, 2019 11:19 pm
On the employment exemption it was unclear if the change had to have been forced to qualify. So even if I just choose to take a new job the partial exemption should still qualify? The earliest we would possibly sell would be at least 19 or 20 months in to owning the current primary so not that far from 2 years anyways.
No employment change does not have to be forced to qualify, just a change in employment for any reason.

Moves not related to employment don't qualify... so don't live in a house for 23 months, retire, sell it and move closer to the kids.
Haha got it, glad you are preventing any further issues for any other houses down the road.

MrBobcat
Posts: 57
Joined: Fri Jan 11, 2019 5:19 pm

Re: CPA advice needed for selling two homes in 2019

Post by MrBobcat » Wed May 15, 2019 11:36 pm

MarkNYC wrote:
Wed May 15, 2019 11:24 pm
MrBobcat wrote:
Wed May 15, 2019 10:59 pm
MarkNYC wrote:
Wed May 15, 2019 10:38 pm
MrBobcat wrote:
Wed May 15, 2019 5:06 pm
tbini87 wrote:
Wed May 15, 2019 5:00 pm


We purchased our current primary residence in Nov 2017, so we have owned it more than a year. We would have to keep it as our primary through November of this year, then rent it out til May 2021 to be fully exempt again.
No. You would have converted it to investment property (by renting for 2 plus years) and it wouldn't qualify for the residence deduction. Short term renting while actively trying to sell normally won't convert a principal residence to investment property but the intent has to be to mitigate the costs while actively trying to sell.
I disagree. The OP should be entitled to the exclusion, except for the portion of the gain attributable to depreciation. There is nothing in the law requiring a specifc reason for renting a former principal residence in order to preserve the exclusion, as long as the 2 out of 5 year use rule is met. See Treas Reg. 1.121-1(c)(4) Example 1.
It's a facts and circumstances issue as to whether it qualifies as a principal residence which is why I included the exception of renting while trying to sell. It no longer qualifies as a principal residence if one converted the property (in fact) to a rental.

If you read the example in the treas regs you posted, it's 2 residences that the fellow spits time between, one of them is deemed his principal one, the other is just a residence. It does not say anything about either of them being converted to rental property.
You incorrectly read Example 1 in Sec (b)(4). Please read Example 1 in Sec (c)(4) which states:

"Taxpayer A has owned and used his house as his principal residence since 1986. On Jan 1, 1998, A moves to another state. A rents his house to tenants from that date until Apr. 18, 2000, when he sells it. A is eligible for the Sec. 121 exclusion because he has owned and used the house as his principal residence for at least 2 of the 5 years preceding the sale."

I stand corrected:

https://www.irs.gov/faqs/capital-gains- ... home-etc-5

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Thu May 16, 2019 8:25 am

MrBobcat wrote:
Wed May 15, 2019 11:36 pm
You incorrectly read Example 1 in Sec (b)(4). Please read Example 1 in Sec (c)(4) which states:

"Taxpayer A has owned and used his house as his principal residence since 1986. On Jan 1, 1998, A moves to another state. A rents his house to tenants from that date until Apr. 18, 2000, when he sells it. A is eligible for the Sec. 121 exclusion because he has owned and used the house as his principal residence for at least 2 of the 5 years preceding the sale."
[/quote]


I stand corrected:

https://www.irs.gov/faqs/capital-gains- ... home-etc-5
[/quote]

So you agree that the rental can be exempted right? As I read more of the info from this thread, Publication 523 in particular, it seems to me that the current primary residence may qualify for a partial exemption if the reason we move is for a new job over 50 miles away.

MrBobcat
Posts: 57
Joined: Fri Jan 11, 2019 5:19 pm

Re: CPA advice needed for selling two homes in 2019

Post by MrBobcat » Thu May 16, 2019 10:31 am

tbini87 wrote:
Thu May 16, 2019 8:25 am
MrBobcat wrote:
Wed May 15, 2019 11:36 pm
You incorrectly read Example 1 in Sec (b)(4). Please read Example 1 in Sec (c)(4) which states:

"Taxpayer A has owned and used his house as his principal residence since 1986. On Jan 1, 1998, A moves to another state. A rents his house to tenants from that date until Apr. 18, 2000, when he sells it. A is eligible for the Sec. 121 exclusion because he has owned and used the house as his principal residence for at least 2 of the 5 years preceding the sale."

I stand corrected:

https://www.irs.gov/faqs/capital-gains- ... home-etc-5
[/quote]

So you agree that the rental can be exempted right? As I read more of the info from this thread, Publication 523 in particular, it seems to me that the current primary residence may qualify for a partial exemption if the reason we move is for a new job over 50 miles away.
[/quote]

I do agree it can be exempted, just be sure to pick up the depreciation recapture. I apologize for going off on an incorrect tangent. It has been a long time since I had to research the issue in depth as I don't run into this specific issue that often. (last time was when a person got one over 55 125,000 exclusion on a residence sale) and the rental conversion was absolutely an issue at that time. You know what they say about assuming things... I incorrectly assumed it was still an issue.

Thankfully there are plenty of well informed people here to point out when someone is wrong.

Good luck with your sales and move.

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Thu May 16, 2019 11:47 am

MrBobcat wrote:
Thu May 16, 2019 10:31 am
tbini87 wrote:
Thu May 16, 2019 8:25 am
MrBobcat wrote:
Wed May 15, 2019 11:36 pm
You incorrectly read Example 1 in Sec (b)(4). Please read Example 1 in Sec (c)(4) which states:

"Taxpayer A has owned and used his house as his principal residence since 1986. On Jan 1, 1998, A moves to another state. A rents his house to tenants from that date until Apr. 18, 2000, when he sells it. A is eligible for the Sec. 121 exclusion because he has owned and used the house as his principal residence for at least 2 of the 5 years preceding the sale."

I stand corrected:

https://www.irs.gov/faqs/capital-gains- ... home-etc-5
So you agree that the rental can be exempted right? As I read more of the info from this thread, Publication 523 in particular, it seems to me that the current primary residence may qualify for a partial exemption if the reason we move is for a new job over 50 miles away.
[/quote]

I do agree it can be exempted, just be sure to pick up the depreciation recapture. I apologize for going off on an incorrect tangent. It has been a long time since I had to research the issue in depth as I don't run into this specific issue that often. (last time was when a person got one over 55 125,000 exclusion on a residence sale) and the rental conversion was absolutely an issue at that time. You know what they say about assuming things... I incorrectly assumed it was still an issue.

Thankfully there are plenty of well informed people here to point out when someone is wrong.

Good luck with your sales and move.
[/quote]

No problem, I appreciate the discussion and help making me look deeper into the issue. Thanks!

Topic Author
tbini87
Posts: 43
Joined: Mon Mar 04, 2019 12:04 am

Re: CPA advice needed for selling two homes in 2019

Post by tbini87 » Thu May 16, 2019 5:08 pm

For what it is worth I have now ran the scenario past 3 CPAs and all of them said they would have to look into it. Between some Trump changes and this scenario being super rare it sounds like they are all also hazy on it or say it’s in a gray area.

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