Capital Gains tax on Former rental then Primary

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Capital Gains tax on Former rental then Primary

Ben Higginbotham
Investor · Spring, TX · Member since 2016 · 23 posts · 14 votes

So here is the situation. My wife and I have just sold a property that we have held since 2009, from the time of purchous till May 2016 it was an occupied rental, from may till October of that year it was vacant as I did some repairs. in October we moved in to the home and lived there as a primary residence untill moving across country so I could take a new job. our total time living there was about 9 Mo. 

The house was bought for 60k and sold for 85k with about 7500 in expenses so there is not much capital gains to be taxed but I dont like paying taxes if I dont need to. I read the IRS code to state that because I lived on the property and then moved to take a new job I can take the 500,000 exemption divided by the percent of 2 years that I lived there and Shelter that abount from capital gains, 

9mo / 24mo = 0.375

500,000 x 0.375 =187,500

If I am understanding this right I should be able to shelter 187,500 in capital gains which will more than cover what we pulled out of the property. Is this correct?

PS I do have a tax accountant but I am being told that there is now way to avoid the gains tax unless you have lived there for 2 years.

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  • Dave Toelkes
    Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
    9y

    @Ben Higginbotham

    You don't tell us the month of puchase nor the month of sale.  For the worst case scenario, let's just say that you owned the property from Jan 2009 through May 2017.  You owned the property for 100 months, but only used it as your primary residence for 9 months, or, you used the property as your primary residence for only 9% of the time you owned the property.

    Your capital gain due to appreciation is $7500 ($85k - $60k - $7500).  The capital gain exclusion only applies to the time the property was your primary residence, so 9% of your capital gain due to appreciation will be allocated to primary residence use and the rest will be allocated to investment property use.

    This means that $675 ($7500 x 9%) can be excluded from capital gains (well within the $187.5K exclusion limit you calculated).  The rest of your capital gain due to appreciation will be taxed as long term capital gain at the rate applicable to your marginal tax bracket.  Additionally, I am guessing you took or should have taken about $12300 in depreciation while the property was a rental.  This depreciation will be recaptured as ordinary income at your marginal tax bracket rate or 25% whichever is less.

    If your marginal bracket rate is 15%, then the federal income tax on the sale of your property could be around $1850.  State taxes, if any, are additional.  I am giving you a rough estimate based upon the information you provided.  Your actual tax bill may be different depending upon your actual numbers and your marginal tax bracket rate.  Of course, Congress can change the tax code and make it retroactive to Jan 2017.

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  • Ben Higginbotham
    OP
    Investor · Spring, TX · Member since 2016 · 23 posts · 14 votes
    9y

    Ok @Dave Toelkes you are saying that the percentage of time is based off the total amoutn of time that I owned it and not the ammount of time out of the last 2 years? that makes some sence I think. Thanks for the comment.

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