Primary residence turned to Rental and Capital Gain Options

[James Rowe]

Looking for advice and first time poster. Thanks for everyone’s open sharing of information and looking for ideas on options Fiancé owns a house in Denver which she lived in for 10 plus years. She relocated to Florida for work, and wanted to keep her home in case she didn’t like Florida or her new job there (or me, lol). She decided to rent the home for the last 8 years and now we are deciding when we do decide to sell how to minimizes taxes. Below are the details and options which I have researched so far. Would love some ideas and comments on options. Purchased the house 18 years ago for $120k Current mortgage $80k but could pay off tomorrow with cash if needed. Current Mortgage Payment $950 (taxes incl) Current rent $1400 per month Current tenant has been there 18 months Only a 500 square foot bungalow with one bedroom one bath. Very desirable part of Denver, and could sell quickly for $450,000 Options 1). Sell the home and purchase two or three single family home rentals in Florida close to where we live for easier management, using a 1031 exchange to avoid huge taxes on capital gains. I estimate capital gains of about $340k. ($450k sell - $120k original cost, + about (10k) in depreciation recapture. At this rare I estimate taxes would be about $100k. 2). Continue renting for 5 more years and move back in for two years as a primary residence then sell. I believe we would to be able to take the one time capital gains exclusion. Option 2 has possibly other issues in that we currently live in my primary residence which has at least $300k appreciation. So I don’t know when we get married how the capital gains on the two properties affect our options. We have been living together for 7 years so the wedding can happen whenever we want, but don’t want to have to pay $100,000 in taxes because if it. Any help would be appreciated. I know this is complicated. Thanks

[Eamonn McElroy]

@James Rowe

A 1031 might be the advisable opinion as this has been a rental for some time.  If you can identify compelling property in FL if might be easier to 1031 the capital over than to meet the MFJ IRC Sec 121 exclusion regarding the property (both you and your spouse would have to use the property as your primary residence for two years).

$120k is your original purchase price, but likely not your adjusted tax basis.  Has depreciation been taken?  Regardless, you'd likely pay 'Unrecaptured Sec 1250 Gain' depreciation taken (or depreciation that should have been taken) whether you sell with or without the IRC Sec 121 exclusion.  With a 1031 you generally can defer the gain.

If depreciation has not been taken, it might be advisable to engage a tax CPA/EA to file an accounting method change on your next tax return.

Probably best to consult a tax CPA/EA in general as they can crunch the numbers for you and examine all of your facts and circumstances.