Tax Questions On Sale of a Old Primary Residence Turned Rental or Keep Renting It

[Ryan Johnston]

Hi,  

I have an old primary residence that tenants have been in and are now vacating, it was a bit of a unique circumstance so I am trying to understand the tax ramifications or best approach.  My current CPA hasn't been much help so I will be finding a new one.

The property was purchased and in 2016 and was my primary residence with my then wife.  We split in May of 2019, I was still living there so to finalize the separation I refinanced her off the loan by paying her equity in July 2019..  The plan was to sell the house so I moved into a condo in August of 2019.  The house wouldn't sell and then sat empty until I decided to rent it with tenants moving in April 10, 2020.  They are now vacating 5/31/2024 after 4 years.  

I am now remarried and my current wife never resided in the old house.  I know this doesn't meet the full 2 of 5 years living in there as primary as the tenants have had a 4 year lease but what if any exclusions are applicable here.  I am trying to understand the full taxable options.  

If I sell am I just paying full capital gains tax or does any type of exclusion or proration lower that?

Is the best option to 1031 exchange?

Should I just keep renting the home?

Some numbers for the house:

Purchase price was 275k, current loan balance is 235k, projected sales price would be $450-500k

The current mortgage plus maintenance is currently $2,200.  It is rented at $2,450 a month which is low and could re-rent anywhere from $2,500-$3,000 a month.  The current mortgage is 2.99%.  

Any thoughts are appreciated.

[Bill B.]

It would be the same as any regular rental. If you sell for $450k and pay about $25k to sell you’d net $425k. You’d owe 15% on the$150k gain (22,5k) plus 4 years of depreciation recapture at 25% ($7k?).  So $30k plus any state income taxes leaves you with $150k+ after paying off mortgage.

You can certainly do a 1031 tax free in to a new rental. (Not a new primary for you and new wife.) but you’d need to get a new loan and reinvest all the cash. Is the current property a bad investment property? (Why sell/exchange?)