Sale of rent house


J

John D. Goulden

We currently own a relatively small house. We are about to
purchase a larger home and are considering keeping the
smaller house as a rental property for ten years or so, then
(after a couple of kids have flown from the nest) selling
the large home (paying no tax on the capital gains, if any)
and moving BACK into the smaller one - then, after having
lived in the small house for at least two years (the rule is
two years out of the last five, isn't it?), selling it and
again paying no tax on the capital gains.

Are there any tax surprises with this scenario? Even if we
rented the small house for a while, if we move back in for
two years, do we get to keep any gains, tax free, from the
sale? From browsing the group I get the impression that if
you once rented your house, gains upon sale are taxed at a
higher rate than even capital gains. Is this true if the
house once again becomes your residence for two years before
a sale?

This is all in Oklahoma, USA, if that matters.

Thanks,
 
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P

Phil Marti

John D. Goulden said:
We currently own a relatively small house. We are about to
purchase a larger home and are considering keeping the
smaller house as a rental property for ten years or so, then
(after a couple of kids have flown from the nest) selling
the large home (paying no tax on the capital gains, if any)
and moving BACK into the smaller one - then, after having
lived in the small house for at least two years (the rule is
two years out of the last five, isn't it?), selling it and
again paying no tax on the capital gains.

Are there any tax surprises with this scenario?
Just one. When you finally sell the rental you will have to
pay tax on the amount of depreciation taken during the
rental period. Other than that, you're in business.

Phil Marti
Topeka, KS
 
D

Drewremedy

We currently own a relatively small house. We are about to
purchase a larger home and are considering keeping the
smaller house as a rental property for ten years or so, then
(after a couple of kids have flown from the nest) selling
the large home (paying no tax on the capital gains, if any)
and moving BACK into the smaller one - then, after having
lived in the small house for at least two years (the rule is
two years out of the last five, isn't it?), selling it and
again paying no tax on the capital gains.

Are there any tax surprises with this scenario? Even if we
rented the small house for a while, if we move back in for
two years, do we get to keep any gains, tax free, from the
sale? From browsing the group I get the impression that if
you once rented your house, gains upon sale are taxed at a
higher rate than even capital gains. Is this true if the
house once again becomes your residence for two years before
a sale?
We currently own a relatively small house. We are about to
purchase a larger home and are considering keeping the
smaller house as a rental property for ten years or so, then
(after a couple of kids have flown from the nest) selling
the large home (paying no tax on the capital gains, if any)
and moving BACK into the smaller one - then, after having
lived in the small house for at least two years (the rule is
two years out of the last five, isn't it?), selling it and
again paying no tax on the capital gains.

Are there any tax surprises with this scenario? Even if we
rented the small house for a while, if we move back in for
two years, do we get to keep any gains, tax free, from the
sale? From browsing the group I get the impression that if
you once rented your house, gains upon sale are taxed at a
higher rate than even capital gains. Is this true if the
house once again becomes your residence for two years before
a sale?
Essentailly correct, you can take both sets of gains tax
free. However the depreciation you must take on the rental
property is NOT entitle to a free ride upon its recovery at
sale--that comes back as "recovery" with a special rate.
Obviously its a long time to get there and its likely to be
a small amount.

If your basis is low but current FMV much higher and you
won't get much depreciation, you might discuss with tax
counsel ways to sell your current home for free current
gain, repurchase it at stepped up value for depreciation
purposes etc. It may or may not work--but ask
 
A

Arthur L. Rubin

John said:
We currently own a relatively small house. We are about to
purchase a larger home and are considering keeping the
smaller house as a rental property for ten years or so, then
(after a couple of kids have flown from the nest) selling
the large home (paying no tax on the capital gains, if any)
and moving BACK into the smaller one - then, after having
lived in the small house for at least two years (the rule is
two years out of the last five, isn't it?), selling it and
again paying no tax on the capital gains.

Are there any tax surprises with this scenario?
The gain on the old house is not excludable, to the
extent of "depreciation allowed or allowable" (after
May 5, 1997). That is taxed at a rate higher than
capital gains, but still limited to 25% even if you're
in a higher tax bracket.

If you're talking about 10 years, that would correspond
to 25-37% of the value of the structure at the time of
conversion to rental.
 
M

Mike Lewis

John D. Goulden said:
We currently own a relatively small house. We are about to
purchase a larger home and are considering keeping the
smaller house as a rental property for ten years or so, then
(after a couple of kids have flown from the nest) selling
the large home (paying no tax on the capital gains, if any)
and moving BACK into the smaller one - then, after having
lived in the small house for at least two years (the rule is
two years out of the last five, isn't it?), selling it and
again paying no tax on the capital gains.

Are there any tax surprises with this scenario? Even if we
rented the small house for a while, if we move back in for
two years, do we get to keep any gains, tax free, from the
sale? From browsing the group I get the impression that if
you once rented your house, gains upon sale are taxed at a
higher rate than even capital gains. Is this true if the
house once again becomes your residence for two years before
a sale?
Depending on your depreciation method, you may have to pay
ordinary gain on depreciation from May 1997. Look up Section
1250 recapture in a publication. I don't remember off the
top of my head, but Pub 17 may explain it.

Mike Lewis, CPA
 
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J

John F.

John D. Goulden said:
We currently own a relatively small house. We are about to
purchase a larger home and are considering keeping the
smaller house as a rental property for ten years or so, then
(after a couple of kids have flown from the nest) selling
the large home (paying no tax on the capital gains, if any)
and moving BACK into the smaller one - then, after having
lived in the small house for at least two years (the rule is
two years out of the last five, isn't it?), selling it and
again paying no tax on the capital gains.

Are there any tax surprises with this scenario? Even if we
rented the small house for a while, if we move back in for
two years, do we get to keep any gains, tax free, from the
sale? From browsing the group I get the impression that if
you once rented your house, gains upon sale are taxed at a
higher rate than even capital gains. Is this true if the
house once again becomes your residence for two years before
a sale?

This is all in Oklahoma, USA, if that matters.
Assuming the law regarding Section 121 sales remains the
same over the next 10 years, your plan is sound. However,
when you sell the smaller home you will have depreciation
recapture. The amount is depreciation allowed or allowable
taxed as a capital gain subject to a maximum rate of 25%.
 

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