Tax exclusion upon sale of home

[Matthew Hirbour]

Hi everyone, 

Question regarding tax exclusion for sale of home. 

My wife and I own a condo in Jackson Hole, Wyoming. We have lived in it for 5 years, and we just got our names pulled for the employee housing lottery offering us a much larger place to live in with extremely low rent. One contingency is that we must sell our property to live in the employee housing. We plan to sell the condo, live in the employee housing unit, and use money gained from sale to put into a REI in an allowable area (no less than 180 miles) from where our employee housing is.

We owe $297,000 and it is currently listed for $729,000. Upon sale we should be in the neighborhood of +$400,000. We would like to take advantage of the tax exclusion of gain for married couples of $500,000. We have never rented it out and thus have never filed for depreciation of assets on our taxes for the property.

Though, the property is not selling and sales in Jackson during winter months are slow. We are considering renting it out while its being sold with a 6mo. lease to help float the costs until summer. 

Question: If we do rent this out while it sells, would we still be eligible for the full exclusion of $500,000? Or being that it would now considered an "allowable" depreciating asset, would we take a harder tax hit? 

What would that tax look like? Would we be taxed on the full gain, or just on the "allowable" depreciation?  

 Is it even worth renting it out for 6mo. or should we avoid this altogether?

[Bill B.]

As long as you’ve lived in the property 2 of the last 5 years and it was your primary first, 100% of the gain up to $500k is tax free. The pro-ration only comes in when it was a rental first. (Because so many of our predecessors took advantage of moving in to long term rentals for just a couple years.) Hence the reason people do 1031’s of long term rentals, resetting the ownership clock and then make it their primary a couple years later.

You won’t have to recapture any depreciation because you won’t take any depreciation if you rent it out and then sell it before the end of the year. 

The number you came to was not your gain, it was your cash after paying off the mortgage which has nothing to do with your gain. If it did you could just take out a $700k loan the day before you sold it, and your “gain” would be $29k. 

Your gain is your selling price, minus any selling costs, minus your purchase price, regardless of what you owe. If you sell for $730k and pay $60k in commission and selling costs you’ll only net $670k. So if you paid more than $170k you won’t have any taxes due. 

Personally I wouldn’t bother eating it out for 6 months before selling. Any buyer will want/have to move in within 30 or 60 days so you eliminate home buyers. Any tenant  could make the property less attractive meaning you get $50k less while selling, plus you make open houses and inspections way harder. What if you go to lo sell and the tenant doesn’t/wont move out? All this is to say move out, get it listed and sell it empty.  Your local agent will tell you if it’s worth waiting 60 days from now before listing but I assume you’ll take time to move anyway. Good luck.