Q: My husband and I bought a tiny home in 2004 and lived in it for 2 years. The property went up in value. We pulled out some of the equity to use as a down payment on a larger home, and kept the tiny home as a rental.
We have rented the tiny home for the past 15 months. Someone told me that if we rent it for more than 2 years, we lose the ability to avoid paying taxes on the profit (up to $500,000 for a married couple) unless we move back into it for 2 years before selling. Is this true?
The property has appreciated $150,000 since 2004 and we will sell it now if this is the only way to avoid paying taxes on the profit. Otherwise, we’d like to keep the house for awhile, since it is still appreciating.
A: This is a good example of why you need to check out what you’re being told by well-intentioned “someones.”
The IRS requires you to live in a home as your primary residence for 2 of the past 5 years. So, you can live in the property as a primary residence for 2 years, then rent it for 3 years and then sell – and still preserve your ability to keep up to $500,000 in profits (up to $250,000 if you’re single) tax free.
You can read the details of this rule for yourself by going to the IRS’s website, www.irs.gov, and downloading publication 523 “Selling Your House.”
Published: Aug 11, 2007