Worst tax consequence of Rental Sale

[Jason Thomas]

Ive been trying to confirm the tax consequence of selling my rental unit and am so far astounded at the negative tax implications ive found.  I purchased this unit in 2001 for $400k and converted it to a rental in 2005 when its Fmv was $750k.  Im now considering selling it in 2016  for around $750k.  What ive found is that the adjusted basis on the gain is calculated from the original purchase price and not the Fmv from when it was converted.  This seems ridiculous since all the gain was from when we used to live in it.  Is this really the case??  What are my best options besides a 1031 exchange.  Is it possible to sell the rental and have the money distributed to me in a note over a 5 year period so that my capital gain tax is reduced since im retired and have no income and would fall into a 0% tax bracket up to 70k in taxable income a year??  Any other possible loopholes?

[Bill Exeter]

Originally posted by @Sunny D.:

I have been told that you dont need to stay 2 years if you want to go back and get the personal residence benefit, you need to stay 2 years to get the 500K exemption. If its say 300K (after selling expenses), you need to stay 14.5 months to get the 300K tax benefit

Hi Sunny,

Unfortunately, this is not correct.  The taxpayer must be able to say they have owned and lived in the property as their primary residence for at least 24 months out of the last 60 months (2 years out of the last 5 years) in order to qualify.  There is no applicable prorated exclusion available here.