Avoiding capital gains by occupying your California rental

[Elena Mafla]

We have owned a home for over 8 Years and rented it for the last six years in California. Can we occupy for the next two years and then sell as owner-occupied to avoid capital gains?

[Ashish Acharya]

Originally posted by @Elena Mafla:

We have owned a home for over 8 Years and rented it for the last six years in California. Can we occupy for the next two years and then sell as owner-occupied to avoid capital gains?

 No you cannot. If you move back in and live it in for two years, then you have to prorate the gain into excludable and includeable gain.

Not entire gain can be excluded. This is called nonqualified use of the personal residence. You don’t get to to exclude the appreciation when the property was rented if you move back in And convert this to a personal residence.

You will also have to pay a maximum 25% tax on the depreciation you have claimed so far.

So basically, if you move back in, and then sell the house after two years ,you will have three components

1)taxable gain

2)depreciation recapture taxed at max 25%

3) excludable gain( 20% of gain if you sell it in two years)