Avoiding Capital Gains Tax On Second Home
REM # F762
By Ilyce R. Glink
Summary: A ThinkGlink reader has owned but rented out a second home for many years. She is now considering moving into the property to avoid capital gains when she sells it. Ilyce explains how the IRS will treat her primary and secondary properties.
Q: My husband and I have lived in one house and have had a second house that
we have rented since we bought it in 1989 for $130,000. It now has a market
value of $450,000.
If you factor in the depreciation we have taken over the years, we’ll have a large capital gains tax to pay if we were to sell it.
Can we move to this house for two years, make it our primary residence and
so qualify for the $500,000 tax break when we do sell? Would we be able to use
the tax exclusion to sell our primary house that would then be an investment
property?
A: Congratulations on making two savvy real estate investments. Yes, you and
your husband can move back into your rental property for two years and then
become eligible to keep the profits tax-free up to $500,000.
However, since you depreciated the property, you will have to pay back at least
some of the depreciation on the property to the IRS. This will eat a bit into
your profits, but you should still receive a healthy check at the closing and
will have avoided capital gains taxes.
Two years after the sale of your home, you can sell the rental property that
was formerly your primary residence and keep another $500,000 in profits tax
free. The IRS only allows you to use this exclusion once every 24 months.
Please talk to your accountant for more details.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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