Primary residence - to rental -than back to primary residence

[Dimitri Carso]

I have a rental property that was originally purchased  as my primary residence. I rented it for several years and now want to occupy it again as my primary.  If I occupy for two years can I then sell and be exempt from capital gains up to the maximum limit. And what happens to  the accumulated depreciation?

[Account Closed]

Dimitri Carso:

I assume that by "rented it for several years" you mean more than three.  That would mean that at this time you do not qualify for Section 121 exclusion of your capital gains on the sale of the property, because you have not owned it and occupied it as your primary residence for two of the past five years.

So, your question is can you move back into the property and occupy it for two years and qualify for the Section 121 exclusion of up to the maximum limit of either $250,000 for a single taxpayer or $500,000 for a married taxpayer.

The answer is that you cannot.

If you move into the property for two years and qualify for Section 121 treatment, you will have two years of "qualified use," and a number of years of "non-qualified use" that would be equal to the number of years you have owned the property minus the two years of "qualified use" as a primary residence.  You have lost the prior qualification.

Divide the two years of "qualified use" by the number of years that you have owned the property at the time of sale, and you have the fraction to determine your exemption amount.

Therefore, if your "non-qualified use" period is 8 years, you will be able to exempt two-tenths, or 20% of the capital gains under Section 121, but this is the "true" capital gains, the difference between what you paid for the property and what you sold it for.

The other 80% will be taxed as Long Term Capital Gains, and you will also have to pay taxes on your Depreciation Recapture for the depreciation that you took while the property was a rental property..

Of course, you could defer the taxes by purchasing another investment property.

I explain how to do this in my book.

I hope this helps.

Good Luck.

Michael Lantrip