Selling previous rental property - need help with decision

[Jim Vinh]

I have a SFH that I have rented out for 9 years. There is quite a bit of capital gain on it (about 500K). I am thinking about selling it now that I am about to retire (and the market is high). If I make my this rental property my primary residence in the next 2 years before selling it, is it as simple as:

1) owning the property for 5 years 

2) live there for 2 years,

then when we sell, the capital gain could be reduced by the $500K (primary residence), or is it more complicate than that? 

I understand the recapture tax will need to be paid in either cases.

If I can get the $500K capital gain exclusion, it may be worth it for me to move there and not sell it now. My advanced thanks to all comments/replies

[Jack Martin]

@Jim Vinh outside of the obvious 1031 strategy, cost segretation/bonus depreciation is another investment strategy that can shelter those gains and defer the tax that will be due. If you are seeking to invest the gains from the sale of your property and do not want to use the 1031 strategy, look for a passive investment with a sponsor who is utilizing the cost segretation/bonus depreciation strategy. 

Here is generally how the strategy plays out: when a sponsor acquires a property, performs a cost segregation study, and takes the bonus election, the portion of the property's value that is allocated to land improvements gets depreciated 100% in the same calendar year the property was purchased. Therefore, the investors receive those passive losses as long as they invested in that same calendar year. 

If you are seeking the highest % of passive losses, look for mobile home park investments as they will have a greater degree of land improvements than other asset types. An investment in a mobile home park fund can garner significant passive losses equal to your entire investment amount. In that case, this strategy would allow you to sell your property, invest the gains, and defer all of the taxes due. 

Keep in mind, this is a tax deferral strategy, so when the property(s) are sold there will be a recapture. However, with depreciation, the recapture is at a flat rate and is not based on your income tax bracket.  Currently, that recapture rate is 25%. Because of this, many investors see this strategy as a win in 2 ways:  first, they are able to invest 100% of their gains into another investment vehicle without paying tax and therefore gain the benefit of 100% of their capital's exposure to the new investment; and second, they are essentially creating tax arbitrage between their tax bracket rate and the flat recapture rate. 

All the best,

Jack