Tax implications - Converting a rental house into a primary residence.


M

MOMAN

Need input on tax implications for converting rental house into primary
residence.

Facts Example: Owner has owned rental house since Nov 1999 and since then
has rented the house until January 1, 2010. On January 1, 2010 the owner
moved into the rental house and has now lived in the former rental house
as his current primary residence. When owner bought rental house in 1999
he was single, now he is married since May 2007. What I need to know is
what are the tax implications if the owner would want to see his former
rental house now primary residence after living in this converted house
for 2 straight years? Would he need to live in it for at least 5 years
total? Also would he be able to legally avoid paying any income or
capital gains taxes on this sale of this home now after living in it 2
years? Can he transfer to his spouse and use her exclusion limits to
avoid paying capital gains tax or income taxes when selling this home now?
Anyone with experience or knowledge on this topic please respond.

-------------------------------------
MOMAN at Large//.



--
+---------------------------[ SERVER SIGNATURE ]-----------+
| Newsgroup Access Courtesy http://www.beansmart.com/ |
| Web, RSS and Social access to your favorite newsgroup - |
| misc.taxes.moderated |
+----------------------------------------------------------+

..
 
Ad

Advertisements

R

removeps-groups

Need input on tax implications for converting rental house into primary
residence.
You still get the section 121 exclusion, but it is reduced. Section
121 allows 250k of capital gain to be tax free if single, and 500k if
married provided you lived in the home for the last 2 years, or 2 of
the last 5 years.
Facts Example:  Owner has owned rental house since Nov 1999 and since then
has rented the house until January 1, 2010.  On January 1, 2010 the owner
moved into the rental house and has now lived in the former rental house
as his current primary residence.  When owner bought rental house in 1999
he was single, now he is married since May 2007.  What I need to know is
what are the tax implications if the owner would want to see his former
rental house now primary residence after living in this converted house
for 2 straight years?  Would he need to live in it for at least 5 years
total?  Also would he be able to legally avoid paying any income or
capital gains taxes on this sale of this home now after living in it 2
years?  Can he transfer to his spouse and use her exclusion limits to
avoid paying capital gains tax or income taxes when selling this home now?
  Anyone with experience or knowledge on this topic please respond.      
You have to allocate the capital gain between the rental use and
personal use. Only the capital gain due to personal use is tax-free
(unless it is more than 500k).

Say you bought the house for $100,000. 10 years depreciation would be
about $36,300. You sell it in 2012 for $1,000,000. So 2 years
qualified use, 10 non-qualifed. So of the 900k capital gain, 2/12 or
$150,000 is qualified. 750,000 is not qualified. You have to
recapture your depreciation, so at the end must pay capital gain on
$786,300. At least that's how I think the example is.
 
P

Phil Marti

Need input on tax implications for converting rental house into primary
residence.
See IRS Publication 523.
Facts Example:  Owner has owned rental house since Nov 1999 and since then
has rented the house until January 1, 2010.  On January 1, 2010 the owner
moved into the rental house and has now lived in the former rental house
as his current primary residence.  When owner bought rental house in 1999
he was single, now he is married since May 2007.  What I need to know is
what are the tax implications if the owner would want to see his former
rental house now primary residence after living in this converted house
for 2 straight years?
Assuming that both spouses used the home as their primary residence
for those 2 years and file a joint return for the year of sale the
full $500,000 exclusion is available. However, not all the gain is
excludable. Depreciation allowed or allowable during the rental
period is recaptured and taxed as ordinary income with a maximum rate
of 25%. Of the remaining gain, the percentage attributable to 2009
cannot be excluded because of "nonqualified use" and is taxed as a
long-term cap gain. The remaining gain is excludable up to $500,000.

This situation is covered in detail in Comprehensive Example 3 on page
25 of Pub 523.

Phil Marti
VITA/TCE Volunteer
Clarksburg, MD

First, there is a period of "nonqualified" use, specifically the year
2009.
 
M

MOMAN

responding to
http://www.beansmart.com/taxes/Tax-implications-Converting-a-rental-house-into-a-primary-31256-.htm
MOMAN wrote:

Phil said:
On Mar 8, 5:55 pm, MOMAN wrote:
See IRS Publication 523.
Assuming that both spouses used the home as their primary residence
for those 2 years and file a joint return for the year of sale the
full $500,000 exclusion is available. However, not all the gain is
excludable. Depreciation allowed or allowable during the rental
period is recaptured and taxed as ordinary income with a maximum rate
of 25%. Of the remaining gain, the percentage attributable to 2009
cannot be excluded because of "nonqualified use" and is taxed
as a
long-term cap gain. The remaining gain is excludable up to $500,000.
This situation is covered in detail in Comprehensive Example 3 on page
25 of Pub 523.
Phil Marti
VITA/TCE Volunteer
Clarksburg, MD
First, there is a period of "nonqualified" use, specifically
the year
2009.


-------------------------------------
MOMAN at Large//.

Thanks for input Phil. Now have another question, after I explained this
to owner, the owner asked me if there was anyway left for him to legally
do something like a 1031 exchange with his property or if I knew of any
other legal tax loophole way for him to be able to avoid paying any
capital gains tax when he sells his new home/residence in the future? He
thought it would be excluded from any capital gains taxes due to the $250K
and $500K exclusion on paying capital gains taxes on your home you live in
for 2 out of 5 yr.



..
 
D

D. Stussy

MOMAN said:
responding to
http://www.beansmart.com/taxes/Tax-implications-Converting-a-rental-house-into-a-primary-31256-.htm
MOMAN wrote:










-------------------------------------
MOMAN at Large//.

Thanks for input Phil. Now have another question, after I explained this
to owner, the owner asked me if there was anyway left for him to legally
do something like a 1031 exchange with his property or if I knew of any
other legal tax loophole way for him to be able to avoid paying any
capital gains tax when he sells his new home/residence in the future? He
thought it would be excluded from any capital gains taxes due to the $250K
and $500K exclusion on paying capital gains taxes on your home you live in
for 2 out of 5 yr.
Currently, he cannot 1031 exchange the property because it is not business
use property. He would need to convert it back to a rental first. Even
so, he still cannot avoid paying tax on the amount of depreciation taken.
However, if he has any carried passive losses accumulated, he may be able
to offset the income.

The only way for him to get out of this without paying income tax is to
die. If the value of this entire net estate is less than the estate tax
unified credit, then he escapes tax free.
 
R

removeps-groups

The only way for him to get out of this without paying income tax is to
die.  If the value of this entire net estate is less than the estate tax
unified credit, then he escapes tax free.
This is not very nice advice.
 
P

Phil Marti

This is not very nice advice.
Maybe unpleasant to contemplate, but very good advice that I've given
on a number of occasions to DIY estate planners who are about to mess
things up by putting someone on the title to the house.

Phil Marti
VITA/TCE Volunteer
Clarksburg, MD
 
Ad

Advertisements

J

JoeTaxpayer

Maybe unpleasant to contemplate, but very good advice that I've given
on a number of occasions to DIY estate planners who are about to mess
things up by putting someone on the title to the house.
removeps - the advice was not a suggestion for the OP to die, just a
fact of how the current tax laws work.

When discussing tax matters and estate planning, there's too much that
can go wrong, and we need to get as comfortable discussing the issues
surrounding death as we are all the other PG14 topics that are in our
face every day.

To Phil - my mother's lawyers made just the mess you allude to, and the
result will be (in today's dollars and tax code) a $30,000 tax bill that
could have easily been zero with the proper council. Strike that, zero
with no council at all, it was talking to the lawyer (obviously one not
trained in estate planning) that started the bad retitling.
 
D

D. Stussy

This is not very nice advice.
He wanted a way out. That is the way out that the IRC provides for. Death
is the only way to wipe out depreciation taken, short of an act of
Congress. It may not be nice, but it satifies the question.
 
M

MOMAN

responding to
http://www.beansmart.com/taxes/Tax-implications-Converting-a-rental-house-into-a-primary-31256-.htm
MOMAN wrote:

D. Stussy wrote:





-------------------------------------
MOMAN at Large//.


Thanks for input, well taken, no feelings hurt here, I appreciate the
candor. It is what it is! I told owner no way out of paying tax on
recapture depreciation anymore he would have to pay tax on that amount
under new rules.

BUT then he came back with One more question I was asked and would like
you guys to give me some input on.

What if owner(man) assigns or signs over the title to the previous rental
house now converted primary residence to his wife and after 2 years the
wife sells the house that is in her name only?

I was stumped on this. Would he be able to do that, I mean would his wife
have to pay some sort of tax even if the husband says here, I am signing
over ownership of this house to you wife in your name. The wife is not on
the current title to the home they are living in now(which was previously
a rental of the owner)?

Please anyone that has had experience in this area or input is welcome.
And thanks for serious input. Very helpful.

..
 
J

JoeTaxpayer

What if owner(man) assigns or signs over the title to the previous rental
house now converted primary residence to his wife and after 2 years the
wife sells the house that is in her name only?

I was stumped on this.
I'm not. When such things are actually possible they are quickly
discovered and corrected. "I can avoid Wash Sale rules, by buying back
in my wife's account" and such spousal things are self-dealing, and not
allowed. If he simply transferred title, she'd take on the same history
he had, just like when I gift my daughter stock, she takes on my basis.
Joe
 
D

D. Stussy

MOMAN said:
responding to
http://www.beansmart.com/taxes/Tax-implications-Converting-a-rental-house-into-a-primary-31256-.htm
MOMAN wrote:
Thanks for input, well taken, no feelings hurt here, I appreciate the
candor. It is what it is! I told owner no way out of paying tax on
recapture depreciation anymore he would have to pay tax on that amount
under new rules.

BUT then he came back with One more question I was asked and would like
you guys to give me some input on.

What if owner(man) assigns or signs over the title to the previous rental
house now converted primary residence to his wife and after 2 years the
wife sells the house that is in her name only?
Depreciation still recaptured. Related party transfer disregarded.
 
Ad

Advertisements

M

MOMAN

responding to
http://www.beansmart.com/taxes/Tax-implications-Converting-a-rental-house-into-a-primary-31256-.htm
MOMAN wrote:

D. Stussy wrote:





-------------------------------------
MOMAN at Large//.

So when you say "disregarded on transfer", what do you mean exactly?
Would the wife now pay tax on recaptured depreciation but not on the rest
of the gain from the sale of rental/now residence once she becomes sole
owner and has her 121 gain exclusion? Sorry for being rock head here,
just confusing me and hard to get handle on today. Thanks for input and
answers.

..
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top