Buying new home and ready to rent existing home

[Tyler Kasowski]

Hello BP! My wife and I are ready to upgrade homes and want to keep our existing home for rental income. We have had a considerable about of appreciation(100k) on the home since we bought in 2011. When we do eventually sell it we want to avoid the capital gain taxes on the appreciation. Would it benefit us to transfer it to an LLC before we start renting? Is there anyway to start our tax basis at today's value not 2011 when we bought? Any help is much appreciated. We are very conservative investors and want to know we have. Way out if being landlords doesn't work out.

[Ashish Acharya]

That is great. How long did you stay in your home? And how long do you plan to rent it for? 

You Primary Residence  will qualify for $250k ( $500k if Married) gain exclusion if all following requirements are met:

• You owned a home and used it as your main home during at least 2 of the last 5 years before the date of the sale.
• You did not claim any exclusion during last 2 years.
• You did not acquire the house with Like Kind exchange during last five years.

If you meet the requirement, you do not have to pay any tax on sale of your house. You can still qualify for the exclusion even if you do not meet one of the criteria. Talk to your CPA about those.

You dont have to leave your home vacant to qualify for the exclusion. You can rent it out when you are not living in the house. Also, you stay does not have to be one block of time. Out of five years you can live for one year, rent for next year, again live for one year, and rent for 2 more years.

IRS uses Fact and Circumstances to determine if the house is your main home. Here are few criteria to judge if your house is your Primary residence when you lived on it.

The house is your main home if:

1) the address is listed as your postal service address,Voters card, on your tax return, or licenses

2) the home is near your work or near any organization where you are involved, where you bank, residence or one of more of your family member.

So, if you plan to sell in 5 years, you can exclude the gain if you stayed in house for in the two years and rented for 3 years.  

If you planning to rent it out for more than 3 years,  than you can always do 1031 exchange to  defer taxes.