Avoiding capital gains tax on a short term rental

[Kelvin J.]

Hi all.

I purchased a property recently with an investment loan, rehabbed it and let it out under a 1-year contract while I live in rented accommodation. I'd like to sell it soon after the contract is up and want to avoid capital gains tax. Could I live in it as my primary residence to achieve this and if so, how long do I have to do this before I can sell?

Many thanks, K

[Dave Foster]

@Kelvin J., I'm sensing some time urgency.  There's really no way around it - the greater the tax advantage the longer it will take to accomplish.  If you sell after one year you'll pay capital gains.  You'll get to add in your capitalized and unrealized expenses and it's Florida so no state tax.  That's not so bad.

If you want you could probably do a 1031 exchange right now given what you've indicated about your intent.  This would defer all tax and allow you to use the deferred tax in your next purchase.  This is probaly the quickest and best option at this point.

To turn the gain tax free you will need to live in it for two years as several have indicated.  So while this is the most tax advantaged option it also takes the greatest amount of time.

Im thinking maybe of one more option that hasn't been discussed yet. You mentioned the undesirability of refinancing because of investment rates and LTV. But what if you combined a couple of these things. Do a refinance to an owner occupied conforming loan and move in. You get a much better refi rate. The cash you get from the refi is not taxable and you can use it for investing immediately. Meanwhile you're now in the countdown to the two year residency required to turn the gain tax free.