Selling a rental property - taxes

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Topic Author
JaceSpade
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Selling a rental property - taxes

Post by JaceSpade » Mon Jul 08, 2019 1:26 pm

I need help understanding taxes on selling our house. We bought it in 2009 as our primary residence. Then we moved out and have been renting it out since October 2016.

I owe $109,000 on it. We're listing it for $469,000. It needs a lot of work, paint, carpets, cleaning, etc.

We are married filing jointly. Any idea on how much we pay on our capital gains?

Any help or advice would be greatly appreciated!

jaxinvestor
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Re: Selling a rental property - taxes

Post by jaxinvestor » Mon Jul 08, 2019 1:56 pm

I am not accountant but I'll try to point you in the right direction.

Do you know your basis for the house? Your profit will be considered using your basis (purchase price plus any significant improvements) not the amount you owe on your mortgage. see: taxmap.irs.gov/taxmap2013/pubs/p523-002.htm

I am assuming that you have been depreciating the house from the period you began renting the home. In that case, you will need to adjust the basis to account for the depreciation that you claimed on your taxes for 2016, 2017 and 2018. The depreciation will be subtracted from your original basis to set a new adjusted basis.

If you lived in the home for two of the last five years, you are eligible for the "principal residence exclusion" of up to 500,000 profit from the sale of the home.

see: www.irs.gov/faqs/capital-gains-losses-a ... home-etc-5

I'd use this information to ball park estimate your potential tax situation. You should really confirm this with an accountant.

rascott
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Re: Selling a rental property - taxes

Post by rascott » Mon Jul 08, 2019 2:18 pm

JaceSpade wrote:
Mon Jul 08, 2019 1:26 pm
I need help understanding taxes on selling our house. We bought it in 2009 as our primary residence. Then we moved out and have been renting it out since October 2016.

I owe $109,000 on it. We're listing it for $469,000. It needs a lot of work, paint, carpets, cleaning, etc.

We are married filing jointly. Any idea on how much we pay on our capital gains?

Any help or advice would be greatly appreciated!
Your basis should be the value of the home when you converted it to a rental. Obliviously this is just a guess.

Without knowing that.... nobody could even give you a ballpark. What you owe on it has zero to do with anything. If you sell it before you October you likely have zero cap gains....other than some deprecation recapture. If it sells after October, gets more complicated.

Sounds like you have substantial gains here....I would REALLY push to get it sold (meaning closed) before October. You don't want to lose all that tax free gain. Now if most of the gain came before Oct 2016, doesn't matter quite as much....but we don't have enough info here to answer that.

knightrider
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Re: Selling a rental property - taxes

Post by knightrider » Mon Jul 08, 2019 2:32 pm

rascott wrote:
Mon Jul 08, 2019 2:18 pm
I would REALLY push to get it sold (meaning closed) before October. You don't want to lose all that tax free gain.
I don't believe the capital gains exclusion is an all or nothing rule. My understanding is it "phases out".. So if you lived there 1 of last 5 years, you are eligible for 50% of 250k or 125k of capital gains exclusion... And double those numbers if you are married!

rascott
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Re: Selling a rental property - taxes

Post by rascott » Mon Jul 08, 2019 2:35 pm

knightrider wrote:
Mon Jul 08, 2019 2:32 pm
rascott wrote:
Mon Jul 08, 2019 2:18 pm
I would REALLY push to get it sold (meaning closed) before October. You don't want to lose all that tax free gain.
I don't believe the capital gains exclusion is an all or nothing rule. My understanding is it "phases out".. So if you lived there 1 of last 5 years, you are eligible for 50% of 250k or 125k of capital gains exclusion... And double those numbers if you are married!

Yes it does....but it's still could come into play here....we don't know with what was posted.

kaneohe
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Re: Selling a rental property - taxes

Post by kaneohe » Mon Jul 08, 2019 6:02 pm

rascott wrote:
Mon Jul 08, 2019 2:18 pm
JaceSpade wrote:
Mon Jul 08, 2019 1:26 pm
I need help understanding taxes on selling our house. We bought it in 2009 as our primary residence. Then we moved out and have been renting it out since October 2016.

I owe $109,000 on it. We're listing it for $469,000. It needs a lot of work, paint, carpets, cleaning, etc.

We are married filing jointly. Any idea on how much we pay on our capital gains?

Any help or advice would be greatly appreciated!
Your basis should be the value of the home when you converted it to a rental. Obliviously this is just a guess.

.......................................................................
https://money.usnews.com/money/blogs/th ... l-property

"When a personal residence is converted to rental property, you need to know the basis for depreciation purposes. This is the lower of your adjusted basis in the residence at the date of conversion (purchase price plus qualified capital improvements), or the fair market value of the property at the time of conversion."

kaneohe
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Re: Selling a rental property - taxes

Post by kaneohe » Mon Jul 08, 2019 6:03 pm

kaneohe wrote:
Mon Jul 08, 2019 6:02 pm
rascott wrote:
Mon Jul 08, 2019 2:18 pm
JaceSpade wrote:
Mon Jul 08, 2019 1:26 pm
I need help understanding taxes on selling our house. We bought it in 2009 as our primary residence. Then we moved out and have been renting it out since October 2016.

I owe $109,000 on it. We're listing it for $469,000. It needs a lot of work, paint, carpets, cleaning, etc.

We are married filing jointly. Any idea on how much we pay on our capital gains?

Any help or advice would be greatly appreciated!
Your basis should be the value of the home when you converted it to a rental. Obliviously this is just a guess.

.......................................................................
https://money.usnews.com/money/blogs/th ... l-property

"When a personal residence is converted to rental property, you need to know the basis for depreciation purposes. This is the lower of your adjusted basis in the residence at the date of conversion (purchase price plus qualified capital improvements), or the fair market value of the property at the time of conversion."

kaneohe
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Re: Selling a rental property - taxes

Post by kaneohe » Mon Jul 08, 2019 6:19 pm

knightrider wrote:
Mon Jul 08, 2019 2:32 pm
rascott wrote:
Mon Jul 08, 2019 2:18 pm
I would REALLY push to get it sold (meaning closed) before October. You don't want to lose all that tax free gain.
I don't believe the capital gains exclusion is an all or nothing rule. My understanding is it "phases out".. So if you lived there 1 of last 5 years, you are eligible for 50% of 250k or 125k of capital gains exclusion... And double those numbers if you are married!
https://www.irs.gov/publications/p523#e ... k100073096

"Does Your Home Qualify for a Partial Exclusion of Gain?
If you don't meet the Eligibility Test, you may still qualify for a partial exclusion of gain. You can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable even"

sounds like there might be some restrictions on this.................

Topic Author
JaceSpade
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Re: Selling a rental property - taxes

Post by JaceSpade » Mon Jul 08, 2019 6:26 pm

We bought it for $200,000 in 2009.

We haven't done any major improvements to it since we bought it. I'm not sure at this time what it was worth in 2016 when we started renting it out.

We enjoyed getting a monthly rent check over the past three years without ever a late payment. But our renters moved out last week and left it a mess. Our Realtor gave us an estimate for $14,800 just to paint the interior and exterior. The carpets are ruined. They left junk all over the house that needs to be removed. It needs a professional cleaning.

I don't think I'm cut out for the whole landlord thing and will probably stick to index funds from now on.

I've always used Turbo Tax, but trying to understand the tax laws is teaching me that I need an accountant.

shiftleft
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Re: Selling a rental property - taxes

Post by shiftleft » Mon Jul 08, 2019 6:39 pm

I believe you need to live there 2 of the last 5 years to be able to qualify for the capital gains exclusion, and it does phase out based on how long you had it as a rental. I wager it will be significantly less than the maximum 500K exclusion since you've rented for nearly 3 out of the last 5 years. Check with an accountant.

rascott
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Re: Selling a rental property - taxes

Post by rascott » Mon Jul 08, 2019 9:07 pm

JaceSpade wrote:
Mon Jul 08, 2019 6:26 pm
We bought it for $200,000 in 2009.

We haven't done any major improvements to it since we bought it. I'm not sure at this time what it was worth in 2016 when we started renting it out.

We enjoyed getting a monthly rent check over the past three years without ever a late payment. But our renters moved out last week and left it a mess. Our Realtor gave us an estimate for $14,800 just to paint the interior and exterior. The carpets are ruined. They left junk all over the house that needs to be removed. It needs a professional cleaning.

I don't think I'm cut out for the whole landlord thing and will probably stick to index funds from now on.

I've always used Turbo Tax, but trying to understand the tax laws is teaching me that I need an accountant.

If you sell it before October, I don't think you need an accountant at all....as there will be nothing due. A big tax free gain.... Enjoy, probably the best tax break in existence.

I know a guy who that's all he does. Buys a beat up house, moves in and renovates it over 2 years, sells for a tax free gain...then wash and repeat. Lives frugal, but doesn't really work, lol.

Topic Author
JaceSpade
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Re: Selling a rental property - taxes

Post by JaceSpade » Tue Jul 09, 2019 11:21 am

rascott wrote:
Mon Jul 08, 2019 9:07 pm

If you sell it before October, I don't think you need an accountant at all....as there will be nothing due. A big tax free gain.... Enjoy, probably the best tax break in existence.
I hope this is correct. But reading through the posts and some Google searches on the topic, I'm still not sure if I'll have to pay capital gains taxes if I can sell before October.

My Realtor thinks it should sell in a month.

rascott
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Re: Selling a rental property - taxes

Post by rascott » Tue Jul 09, 2019 11:28 am

JaceSpade wrote:
Tue Jul 09, 2019 11:21 am
rascott wrote:
Mon Jul 08, 2019 9:07 pm

If you sell it before October, I don't think you need an accountant at all....as there will be nothing due. A big tax free gain.... Enjoy, probably the best tax break in existence.
I hope this is correct. But reading through the posts and some Google searches on the topic, I'm still not sure if I'll have to pay capital gains taxes if I can sell before October.

My Realtor thinks it should sell in a month.

The rule is pretty clear. If it was your primary residence until Oct 2016....you will owe nothing if it is sold before Oct 2019.

Topic Author
JaceSpade
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Re: Selling a rental property - taxes

Post by JaceSpade » Tue Jul 09, 2019 11:37 am

rascott wrote:
Tue Jul 09, 2019 11:28 am
The rule is pretty clear. If it was your primary residence until Oct 2016....you will owe nothing if it is sold before Oct 2019.
This is what I wanted to hear!

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HueyLD
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Re: Selling a rental property - taxes

Post by HueyLD » Tue Jul 09, 2019 11:47 am

JaceSpade,

You have not been given good advice. And the best way to learn it the right way is by reading official documents from the IRS.

Here are links for two very good ones, one is a recap and the other has all the details.

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

https://www.irs.gov/pub/irs-pdf/p523.pdf

If you cannot understand the IRS pubs, I highly recommend that you hire a professional to do your taxes for the year of sale.

rascott
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Re: Selling a rental property - taxes

Post by rascott » Tue Jul 09, 2019 12:27 pm

HueyLD wrote:
Tue Jul 09, 2019 11:47 am
JaceSpade,

You have not been given good advice. And the best way to learn it the right way is by reading official documents from the IRS.

Here are links for two very good ones, one is a recap and the other has all the details.

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

https://www.irs.gov/pub/irs-pdf/p523.pdf

If you cannot understand the IRS pubs, I highly recommend that you hire a professional to do your taxes for the year of sale.

What is the bad advice? The 2/5 rule is pretty straight forward.

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HueyLD
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Re: Selling a rental property - taxes

Post by HueyLD » Tue Jul 09, 2019 12:46 pm

You may want to read the links I provided.

shiftleft
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Re: Selling a rental property - taxes

Post by shiftleft » Tue Jul 09, 2019 12:57 pm

I concur that the advice is bad as well. You need to read the tax laws. Just because you lived in the home 2 of 5 years doesn't mean you get the full 500K capital gain exclusion. The moment you rented it out, that number starts phasing down. You may not need an accountant, but I have been in this situation before and the capital gains exclusion goes down rapidly once you move out and start renting. So some of your capital gains is excluded, but not all. I strongly suggest you see an accountant and read the tax docs if you don't understand. You can even do a trial run (pretend sale) in turbo tax/hr block at home and see what it says.

MarkNYC
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Re: Selling a rental property - taxes

Post by MarkNYC » Tue Jul 09, 2019 1:00 pm

JaceSpade wrote:
Mon Jul 08, 2019 1:26 pm
I need help understanding taxes on selling our house. We bought it in 2009 as our primary residence. Then we moved out and have been renting it out since October 2016.
You've been renting it out since Oct 2016. Did you move out the same month, or did you move out sometime prior to Oct 2016?

Topic Author
JaceSpade
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Re: Selling a rental property - taxes

Post by JaceSpade » Tue Jul 09, 2019 1:36 pm

MarkNYC wrote:
Tue Jul 09, 2019 1:00 pm
You've been renting it out since Oct 2016. Did you move out the same month, or did you move out sometime prior to Oct 2016?
We moved out early October 2016. Renters moved in maybe a week or two later. I'll have to check.

I'll try and wade through the IRS links.

Topic Author
JaceSpade
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Re: Selling a rental property - taxes

Post by JaceSpade » Tue Jul 09, 2019 2:05 pm

We purchased it for 200k in 2009.

According to Zillow, the house was worth 406.1k when we started renting it out in October 2016.

We're listing it at 470k.

I've used Turbo Tax for our taxes and know I deducted landscaping expenses, rental manager fees and some minor repairs. I don't now recall deducting anything for depreciation.

From a quick scan of the IRS links provided above, it looks like I'm well under the 500k capital gain exclusion, if I understand correctly.

stats99
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Re: Selling a rental property - taxes

Post by stats99 » Tue Jul 09, 2019 2:14 pm

Regardless of whether or not you took the depreciation deduction, you may still owe depreciation recapture upon the sale of the unit.

chevca
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Re: Selling a rental property - taxes

Post by chevca » Tue Jul 09, 2019 2:19 pm

JaceSpade wrote:
Tue Jul 09, 2019 2:05 pm
We purchased it for 200k in 2009.

According to Zillow, the house was worth 406.1k when we started renting it out in October 2016.

We're listing it at 470k.

I've used Turbo Tax for our taxes and know I deducted landscaping expenses, rental manager fees and some minor repairs. I don't now recall deducting anything for depreciation.

From a quick scan of the IRS links provided above, it looks like I'm well under the 500k capital gain exclusion, if I understand correctly.
Well, bad news. You will owe depreciation recapture whether you claimed it or not since turning it into a rental. I.E. you should have been claiming it! That's also based off what the house was worth when turned into a rental divided by 27.5 (years). You missed out on a nice perk of having a rental claiming depreciation. You should have been claiming roughly $14.5k per year based on the numbers you've given. But, now you still get to pay for it. :happy

I also don't believe you get the full capital gains exclusion. But, having lived there some of the last 5 years will help you some. I'm not sure exactly how that works though.

It sounds for the best you sell this place and not be a landlord. Or, get a tax guy and a property manager and let them do everything. I was an accidental landlord at one time and that's what I did because I knew nothing about owning a rental. I would definitely recommend you get a tax guy/gal to do your taxes for 2019 after selling the rental and all that will come with that.

Do you plan on doing any other work or repairs before selling it? Doing a bunch of that stuff and the costs of it could lower your gains to help with taxes and depreciation. You would have to work the numbers to know for sure though.

jebmke
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Re: Selling a rental property - taxes

Post by jebmke » Tue Jul 09, 2019 2:21 pm

chevca wrote:
Tue Jul 09, 2019 2:19 pm
Well, bad news. You will owe depreciation recapture whether you claimed it or not since turning it into a rental. I.E. you should have been claiming it! That's also based off what the house was worth when turned into a rental divided by 27.5 (years).
The value of the land would be subtracted from the total to get the basis for depreciation. Only the structure is subject to depreciation.
When you discover that you are riding a dead horse, the best strategy is to dismount.

chevca
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Re: Selling a rental property - taxes

Post by chevca » Tue Jul 09, 2019 2:23 pm

jebmke wrote:
Tue Jul 09, 2019 2:21 pm
chevca wrote:
Tue Jul 09, 2019 2:19 pm
Well, bad news. You will owe depreciation recapture whether you claimed it or not since turning it into a rental. I.E. you should have been claiming it! That's also based off what the house was worth when turned into a rental divided by 27.5 (years).
The value of the land would be subtracted from the total to get the basis for depreciation. Only the structure is subject to depreciation.
You're right. I'd forgotten all about that part of it.

Topic Author
JaceSpade
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Re: Selling a rental property - taxes

Post by JaceSpade » Tue Jul 09, 2019 2:27 pm

chevca wrote:
Tue Jul 09, 2019 2:19 pm

Well, bad news. You will owe depreciation recapture whether you claimed it or not since turning it into a rental. I.E. you should have been claiming it! That's also based off what the house was worth when turned into a rental divided by 27.5 (years). You missed out on a nice perk of having a rental claiming depreciation. You should have been claiming roughly $14.5k per year based on the numbers you've given. But, now you still get to pay for it. :happy

I also don't believe you get the full capital gains exclusion. But, having lived there some of the last 5 years will help you some. I'm not sure exactly how that works though.

It sounds for the best you sell this place and not be a landlord. Or, get a tax guy and a property manager and let them do everything. I was an accidental landlord at one time and that's what I did because I knew nothing about owning a rental. I would definitely recommend you get a tax guy/gal to do your taxes for 2019 after selling the rental and all that will come with that.

Do you plan on doing any other work or repairs before selling it? Doing a bunch of that stuff and the costs of it could lower your gains to help with taxes and depreciation. You would have to work the numbers to know for sure though.
We're going to put some money into it before selling; paint, carpets, cleaning, minor repairs.

Definitely think I need a tax guy this time around. I read IRS verbiage and might as well be reading Greek. Looks like there's no consensus in this thread on if I will owe or not, either.

chevca
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Re: Selling a rental property - taxes

Post by chevca » Tue Jul 09, 2019 2:32 pm

Yeah, I gloss over in a hurry when I try to read tax law stuff. :happy

chevca
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Re: Selling a rental property - taxes

Post by chevca » Tue Jul 09, 2019 2:38 pm

I believe the basic version of how it will work for you, and I'm not at all an expert, is your gains from when you bought it until you turned it in to a rental will meet the exclusion part. But, the 3 years you had it as a rental will still be subject to the gains tax. So, $406k to whatever you sell it for. That's good news for you. But, I don't think it will all be tax free, just partial. It is the government after all. :happy

chevca
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Re: Selling a rental property - taxes

Post by chevca » Tue Jul 09, 2019 2:50 pm

rascott wrote:
Tue Jul 09, 2019 12:27 pm
HueyLD wrote:
Tue Jul 09, 2019 11:47 am
JaceSpade,

You have not been given good advice. And the best way to learn it the right way is by reading official documents from the IRS.

Here are links for two very good ones, one is a recap and the other has all the details.

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

https://www.irs.gov/pub/irs-pdf/p523.pdf

If you cannot understand the IRS pubs, I highly recommend that you hire a professional to do your taxes for the year of sale.

What is the bad advice? The 2/5 rule is pretty straight forward.
Nothing about tax law is straight forward. :happy

DVMResident
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Re: Selling a rental property - taxes

Post by DVMResident » Tue Jul 09, 2019 3:06 pm

chevca wrote:
Tue Jul 09, 2019 2:23 pm
jebmke wrote:
Tue Jul 09, 2019 2:21 pm
chevca wrote:
Tue Jul 09, 2019 2:19 pm
Well, bad news. You will owe depreciation recapture whether you claimed it or not since turning it into a rental. I.E. you should have been claiming it! That's also based off what the house was worth when turned into a rental divided by 27.5 (years).
The value of the land would be subtracted from the total to get the basis for depreciation. Only the structure is subject to depreciation.
You're right. I'd forgotten all about that part of it.
Luckily this mistake should only impact a fraction of 2016 and all of 2017-2018. 2019 is not too late to fix. This mistake should only be a few thousand (I’m not sure what the land/improvement split is, but you can find it on your assessment). As mistakes go, this one is fairly minor and tiny relative to your gains (congrats!).

However, depreciation is a fairly basic tax feature for rentals and suggests there could be other tax issues. I’ll recommend getting professional help. They may not be able to fix the depreciation, but they might uncover other items.

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G12
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Re: Selling a rental property - taxes

Post by G12 » Tue Jul 09, 2019 3:12 pm

Maybe you should have the prior 2 years of personal tax filings recast to take the depreciation. Also, ask CPA or whomever, as you might be able to deduct the full $14.8k of repairs, but don't know if painting will qualify. I knew for sure about the depreciation recapture coming up. It would be worthwhile to discuss these points with a professional to know with certainty, and possibly save you money. I had one SFR rental which I sold after 6-years, and having to gross up the past annual depreciation, ie "recapture" and pay flat 25% Fed, + 6% state as it is considered income stacked upon your other income, although we never lived in the house. Still made a good return, but taxes put a big dent in that. I didn't want to do a 1031 exchange at that time, but if I had known we would be moving I probably would have bought another SFR in the new state and moved in later. Taxable investing and taxes, joy-joy. Good luck.

kaneohe
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Re: Selling a rental property - taxes

Post by kaneohe » Tue Jul 09, 2019 5:36 pm

chevca wrote:
Tue Jul 09, 2019 2:38 pm
I believe the basic version of how it will work for you, and I'm not at all an expert, is your gains from when you bought it until you turned it in to a rental will meet the exclusion part. But, the 3 years you had it as a rental will still be subject to the gains tax. So, $406k to whatever you sell it for. That's good news for you. But, I don't think it will all be tax free, just partial. It is the government after all. :happy
I'm as much of an expert as you are.........which is to say I'm not either :happy ............but Huey's link from Pub 523 has a wksht 3
to calculate how much of the exclusion you can use if you've rented home out. I read a Kitces article that suggests a "fix" was implemented
to prevent folks from renting out their home and then coming back to live in it for 2 yrs just to claim the full exclusion. In that case the
exclusion was prorated for the time lived in the home w/ the rental part being excluded. However, I did not get the impression that
there was any exclusion proration if the owner moved out , rented the home and never came back to live.

Wksht 3 has this wording:

"Section B. Determine your non-qualified use gain. Complete this section only if there is a period, after the
year 2008, when neither you nor your spouse (or your former spouse) used the property as a main home,
and that period of non-use occurred during the 5-year period prior to the date of sale and before the time
when you or your spouse (or your former spouse) used the property as a main home.
* Otherwise, skip to
Section C."

In OPs case.......they lived in it, then rented it out and then sold it.........there was a period of non-use that occurred during
the 5 yr period prior to sale......but this was not before OP used property as main home......it was after. I didn't follow the rest of the wksht
but it sounded like there was no non-qualified use so all of the exclusion would be available?

chevca
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Re: Selling a rental property - taxes

Post by chevca » Tue Jul 09, 2019 6:47 pm

It very well could be available that way. I'm mostly throwing a guess out there based on my understanding of past threads and links. It is not an easy process tax wise. I'm pretty sure of that. :happy

venus_06
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Re: Selling a rental property - taxes

Post by venus_06 » Tue Jul 09, 2019 7:47 pm

JaceSpade wrote:
Tue Jul 09, 2019 2:05 pm
We purchased it for 200k in 2009.

According to Zillow, the house was worth 406.1k when we started renting it out in October 2016.

We're listing it at 470k.

I've used Turbo Tax for our taxes and know I deducted landscaping expenses, rental manager fees and some minor repairs. I don't now recall deducting anything for depreciation.

From a quick scan of the IRS links provided above, it looks like I'm well under the 500k capital gain exclusion, if I understand correctly.
I don’t think that’s how it works. Your basis is not what Zillow says that house is worth at the time you converted to a rental. Your basis should be the 200k number from 2009, subtract whatever part is land, plus any capital improvements. It definitely sounds like that is lower than the fair market value at the time of conversion, so you would need to use that number. If you hadn’t converted to rental, I believe you could use 200k+capital improvements as your basis, without having to subtract land. In any case, I think the basis would be much lower than 406k. And as others have indicated above, you would have to take depreciation recapture which is taxed at ordinary income rate.

kaneohe
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Re: Selling a rental property - taxes

Post by kaneohe » Tue Jul 09, 2019 8:48 pm

venus_06 wrote:
Tue Jul 09, 2019 7:47 pm
.............................................................

I don’t think that’s how it works. Your basis is not what Zillow says that house is worth at the time you converted to a rental. Your basis should be the 200k number from 2009, subtract whatever part is land, plus any capital improvements. It definitely sounds like that is lower than the fair market value at the time of conversion, so you would need to use that number. If you hadn’t converted to rental, I believe you could use 200k+capital improvements as your basis, without having to subtract land. In any case, I think the basis would be much lower than 406k. And as others have indicated above, you would have to take depreciation recapture which is taxed at ordinary income rate.
Isn't the basis in the 3rd sentence (bolded) the depreciable cost basis? Wouldn't the land be added back in at the end since it's the other part of basis.......non-depreciable? so really not that different than the non-rental case except for the depreciable part.
Last edited by kaneohe on Tue Jul 09, 2019 11:36 pm, edited 1 time in total.

AerialWombat
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Re: Selling a rental property - taxes

Post by AerialWombat » Tue Jul 09, 2019 9:23 pm

I only scanned the thread, but in case nobody else mentioned it: File a 1040-X to amend your 2017 and 2018 returns to claim the depreciation that it appears you didn’t claim. This will result in a small refund check.

You will pay depreciation recapture tax whether you claimed the depreciation or not, so you’re better off amending and getting the benefit.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

MarkNYC
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Re: Selling a rental property - taxes

Post by MarkNYC » Wed Jul 10, 2019 1:00 pm

The fair market value at the time of converting to a rental is relevant only for computing correct depreciation. It is not relevant for calculating the gain upon sale.

Depreciation, whether taken or not, will reduce basis and increase the gain, and the portion of the gain attributable to depreciation is not eligible for the principal residence exclusion.

In this situation, there is no option for a partial exclusion, because there was no life event that prompted the sale prior to the owner being able to live in the residence the full 2 years.

The 3 year period after moving out of the principal residence does not constitute "nonqualified use" therefore it does not diminish the amount of the available exclusion.

MarkNYC
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Re: Selling a rental property - taxes

Post by MarkNYC » Wed Jul 10, 2019 1:31 pm

AerialWombat wrote:
Tue Jul 09, 2019 9:23 pm
You will pay depreciation recapture tax whether you claimed the depreciation or not....
This is a widely-held belief, but it's not correct. When the amount of "allowable" depreciation is more than the amount of depreciation actually taken ("allowed"), the amount of gain upon sale that is subject to the depreciation recapture tax (with a 25% maximum) is the lower of the two. So if zero depreciation is actually taken, then zero is subject to the recapture tax. This is explained in Code Sec 1250(b)(3).

It still makes sense to take the full amount of depreciation allowable, for 2 reasons:
1) basis will be reduced and the gain upon sale increased even if the allowable depreciation is not taken, and
2) depreciation reduces the current year ordinary rental income or increases ordinary rental loss, while the depreciation portion of the gain upon sale is often taxed at a lower rate.

shiftleft
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Re: Selling a rental property - taxes

Post by shiftleft » Wed Jul 10, 2019 1:37 pm

MarkNYC wrote:
Wed Jul 10, 2019 1:00 pm
The 3 year period after moving out of the principal residence does not constitute "nonqualified use" therefore it does not diminish the amount of the available exclusion.
Thanks for the clarification on this point. Looks like I missed this and was considering it "nonqualified use" in my previous posts.

AerialWombat
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Re: Selling a rental property - taxes

Post by AerialWombat » Wed Jul 10, 2019 2:37 pm

MarkNYC wrote:
Wed Jul 10, 2019 1:31 pm
This is explained in Code Sec 1250(b)(3).
Thanks for the cite. Learn something new every day!
“Life doesn’t come with a warranty.” -Michael LeBoeuf

JGoneRiding
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Re: Selling a rental property - taxes

Post by JGoneRiding » Wed Jul 10, 2019 4:10 pm

rascott wrote:
Mon Jul 08, 2019 9:07 pm
JaceSpade wrote:
Mon Jul 08, 2019 6:26 pm
We bought it for $200,000 in 2009.

We haven't done any major improvements to it since we bought it. I'm not sure at this time what it was worth in 2016 when we started renting it out.

We enjoyed getting a monthly rent check over the past three years without ever a late payment. But our renters moved out last week and left it a mess. Our Realtor gave us an estimate for $14,800 just to paint the interior and exterior. The carpets are ruined. They left junk all over the house that needs to be removed. It needs a professional cleaning.

I don't think I'm cut out for the whole landlord thing and will probably stick to index funds from now on.

I've always used Turbo Tax, but trying to understand the tax laws is teaching me that I need an accountant.

If you sell it before October, I don't think you need an accountant at all....as there will be nothing due. A big tax free gain.... Enjoy, probably the best tax break in existence.

I know a guy who that's all he does. Buys a beat up house, moves in and renovates it over 2 years, sells for a tax free gain...then wash and repeat. Lives frugal, but doesn't really work, lol.
Sorry that is not how it works. It is confusing but the short answer is it is prorated. But turbo tax did a great job for me in getti ng it figured out when I did the same thing last year.

I believe pub 525 or 535 is the one you need to read or just trust turbo tax! ;)

MarkNYC
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Re: Selling a rental property - taxes

Post by MarkNYC » Wed Jul 10, 2019 6:16 pm

JGoneRiding wrote:
Wed Jul 10, 2019 4:10 pm
rascott wrote:
Mon Jul 08, 2019 9:07 pm
JaceSpade wrote:
Mon Jul 08, 2019 6:26 pm
We bought it for $200,000 in 2009.

We haven't done any major improvements to it since we bought it. I'm not sure at this time what it was worth in 2016 when we started renting it out.

We enjoyed getting a monthly rent check over the past three years without ever a late payment. But our renters moved out last week and left it a mess. Our Realtor gave us an estimate for $14,800 just to paint the interior and exterior. The carpets are ruined. They left junk all over the house that needs to be removed. It needs a professional cleaning.

I don't think I'm cut out for the whole landlord thing and will probably stick to index funds from now on.

I've always used Turbo Tax, but trying to understand the tax laws is teaching me that I need an accountant.

If you sell it before October, I don't think you need an accountant at all....as there will be nothing due. A big tax free gain.... Enjoy, probably the best tax break in existence.

I know a guy who that's all he does. Buys a beat up house, moves in and renovates it over 2 years, sells for a tax free gain...then wash and repeat. Lives frugal, but doesn't really work, lol.
Sorry that is not how it works. It is confusing but the short answer is it is prorated. But turbo tax did a great job for me in getti ng it figured out when I did the same thing last year.

I believe pub 525 or 535 is the one you need to read or just trust turbo tax! ;)
I believe you're mistaken, and I don't think either of the IRS publications you listed addresses the tax issue being discussed.

Perhaps you misunderstood the IRS instructions you read, or misunderstood the TurboTax interview questions, or perhaps your circumstances were different from the OP's circumstances. In any case, if the OP used the property as a principal residence for at least 2 of the 5 years on the date of sale then the full $500K exclusion is available, but the portion of the gain attributable to rental depreciation is not eligible for the exclusion.

A proration of the full exclusion amount only applies when, starting Jan 1, 2009, there is a period of nonquaified use prior to the period of use as a principal residence. Nonqualified use usually involves use as a second residence or rental property use.
Code Sec 121.

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