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Updated about 1 year ago,

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Karen Sayre
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Smart tax strategy. Capital gains on rental. Ideas wanted.

Karen Sayre
Posted

Hello all. 
I am new to this forum, so thanks for accepting me. I’m hoping for help brainstorming my current situation.  
I'm not sure if this is the right category to post in. Sorry if this is long.

I bought a house with 2 units in 2014. I renovated both units and lived in the upper unit. (250k in upgrades)

I got married and moved out in 2019. Both units have been rented since.  It has had a nice positive cash flow of 2K per month. The house remains in just my name.  As part of an eventual move back to the UK in 4 to 5 years, I'm trying to plan a strategy for minimizing tax bills down the road. A 1031 doesn’t interest me. The house is empty at this moment so if I was going to sell or move back in, now would be the time. If I sell now, a tax bill with no exemption would be crazy big. If we sell my primary house instead (thereby gaining the  $500 exemption on that property) and move into the 2-unit property for 3 years, would it be any real financial advantage? If I don’t rent out the other unit  (using the whole property as primary) does that increase the pro rata of exclusion enough to offset the rental income not received from the other unit for the 3 years ( 36000) in the 3 years? The current recapture is around 138k. 
Do I want to move back in? Not really, but if the financial benefits are worth it I will. As I see it, here are the main scenarios. 

scenario 1 . Sell as rental property now and take the hit tax-wise. Would filing separately rather than married status make any difference to tax due.? Probably not enough of a difference to make this palatable. Taxes very high

Scenario 2. Keep renting it out for 3 more years (annual positive income around 25k). Sell after 3 years and take the tax hit after that time. 

Move back into the 2 family and rent out one unit, filing jointly after 3 years get 50% of the 500k exemption since I would be occupying one half of the building.  (the house has appreciated by more than  500k) but would then also have a larger recapture amount.

Move back to 2 family use both units so no longer a rental and sell in 3 years. 
Not sure under this scenario - 3/5 years not as rental- would I get the full 500k exemption(recapture would still apply) if as a couple we would get the full 500k exemption- would that be a real saving versus the amount of rent lost from the 2nd unit (36000 over 3 years)

Whew!!   I’d love to hear some thoughts and your creative ideas on what move to make.