USA Capital gain tax on rental property

[windharp]

I read a similar post for the year 2007 but would like updated information. I have a rental property in California. If I sell it as the same basis that I bought it at (after figuring in capital expenditures minus depreciation), and choose to invest the money and not purchase another rental property, what are the taxes on the property? Is the rule of tax exclusion still applicable if I move into the property and make it my personal residence for two years before selling?

 

[CPAInsider]

You will have to pay capital gains tax on the incremental amount you receive above your calculated basis. Even if you choose to invest the money, you will still have to pay capital gains taxes if you make a gain by selling. I believe that the requirement is to live in the property for 2 out of the first 5 years that you own it to qualify for the exclusion of taxes on a gain.

 

[windharp]

Thanks!

That makes sense. I have to find out if living in the property for a certain amount of time is still valid.

You will have to pay capital gains tax on the incremental amount you receive above your calculated basis. Even if you choose to invest the money, you will still have to pay capital gains taxes if you make a gain by selling. I believe that the requirement is to live in the property for 2 out of the first 5 years that you own it to qualify for the exclusion of taxes on a gain.

 

[Marshall]

Effective January 1, 2009, the exclusion will not apply to gain from the sale of the residence that is allocable to periods of “nonqualified use.” Nonqualified use refers to periods that the property is not used as the taxpayer’s principal residence. This change applies to use as a second home as well as a rental.

Periods before January 1, 2009 do not count as periods of nonqualified use.

Here is a simple example. You buy a rental property on January 1, 2007 and rent it until December 31, 2012 (6 years). You move in and use it as your principal residence from January 1, 2013 to December 31, 2015 (3 years) and sell it for a gain of $180,000.

You owned the property for a total of 9 years and had nonqualified use for 4 of those years (2009 through 2012). Of your total gain, 4/9 Is allocated to periods of nonqualified use, so $80,000 of your gain is taxable and $100,000 is excluded.