Will Renting Out A Room Change Tax Bill At Sale?
REM #A647
By Ilyce R. Glink
Summary: A reader has been renting out a room in their home and taking the depreciation and deductions. Now that they are ready to sell, they will need to pay taxes on the depreciation they took and the capital gains they make on the investment portion of the property.
Q: I have lived my home for the past five years but also rent rooms and take
depreciation and deductions.
Can I sell the home and buy another without paying the capital gains or other taxes?
A: In general, when you sell your primary residence, you are entitled to keep
up to $250,000 in profits (up to $500,000 if you're married) tax free. What
complicates your situation is that you've used a portion of your personal residence
for business purposes. That means your property is partly an investment property.
If you do nothing, and sell the property outright, you may owe tax for the depreciation
you previously took, as well as tax on the profits from the sale on the investment
portion of the property.
But you may be able to benefit by combining the $250,000 exclusion to which
you're entitled on the sale of a primary residence you've owned for at least
24 months with a 1031 tax-free exchange. A 1031 tax free exchange allows you
to buy a replacement investment property (provided it costs at least as much
as the property you're selling, among other rules) and defer any taxes owed.
You should talk to a knowledgeable accountant who can help you figure out how
you would structure this deal so that you could defer paying taxes.
In general, if you have investment property and choose not to do a 1031 tax-free
exchange, you'd have to pay tax on the recapture and on any capital gains generated
by the property's sale.
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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