Taxes when convert Primary to Rental to Primary - 2009 Exclusion?

[L Huang]

Hi Everyone, Happy Holidays!

In this article about "Taxes when converting your rental to primary" - https://www.nolo.com/legal-encyclopedia/taxes-when-you-convert-your-rental-property-your-personal-residence.html, it mentions an Exception that I hadn't heard of before. I was familiar with the "2 out of 5 year" exemption but not this 2009 exception.

I hope that some of you can reconfirm that my belief is correct - that this Exception does not apply to my situation because if it did, then that would be a bad surprise.

From the article: 

"However, a special rule enacted in 2009 limits the $250,000/$500,000 exclusion for homeowners who initially use their home for purposes other than their principal residence, such as a rental or vacation home. The rule requires you to reduce pro rata the amount of profit you exclude from your income based on the number of years after 2008 you used the home as a rental, vacation home, or other “nonqualifying use.

Here is my situation:

I have a Coop in Manhattan that I bought in 2006 and initially lived in for many years as my primary residence but then rented out. I plan to move back in for 2 years as Primary Residence in 2023 and 2024 to cover the 2 out of 5 years. Here are the details:

2006-2013: My Primary Residence

2014-2022: Rented out 2 out of 3 years during this period (my coop bylaw said that every third year had to be vacant) 

2023-2024: I plan to move back in and be my primary residence for 2 years to cover 2 out of 5 year rule so I can take the $500k exemption.

Questions:

a) I do NOT think that I am subject to this 2009 exception rule as the home was initially my home/primary residence before I started to rent it out, and therefore can take the FULL $500k exemption in 2025 when I sell. I hope that you can either confirm this is accurate.

b) Also, for any year of vacancy due to my Coop by law where I need to leave it empty every third year would I just treat those as "regular" rental years but with no income but still take depreciation and all the tax deductions (eg. monthly maintenance, property tax)?

Thank you very much in advance and Happy Holidays!

L

[Ashish Acharya]

Originally posted by @L Huang:

Hi Everyone, Happy Holidays!

In this article about "Taxes when converting your rental to primary" - https://www.nolo.com/legal-encyclopedia/taxes-when-you-convert-your-rental-property-your-personal-residence.html, it mentions an Exception that I hadn't heard of before. I was familiar with the "2 out of 5 year" exemption but not this 2009 exception.

I hope that some of you can reconfirm that my belief is correct - that this Exception does not apply to my situation because if it did, then that would be a bad surprise.

From the article: 

"However, a special rule enacted in 2009 limits the $250,000/$500,000 exclusion for homeowners who initially use their home for purposes other than their principal residence, such as a rental or vacation home. The rule requires you to reduce pro rata the amount of profit you exclude from your income based on the number of years after 2008 you used the home as a rental, vacation home, or other “nonqualifying use.

Here is my situation:

I have a Coop in Manhattan that I bought in 2006 and initially lived in for many years as my primary residence but then rented out. I plan to move back in for 2 years as Primary Residence in 2023 and 2024 to cover the 2 out of 5 years. Here are the details:

2006-2013: My Primary Residence

2014-2022: Rented out 2 out of 3 years during this period (my coop bylaw said that every third year had to be vacant) 

2023-2024: I plan to move back in and be my primary residence for 2 years to cover 2 out of 5 year rule so I can take the $500k exemption.

Questions:

a) I do NOT think that I am subject to this 2009 exception rule as the home was initially my home/primary residence before I started to rent it out, and therefore can take the FULL $500k exemption in 2025 when I sell. I hope that you can either confirm this is accurate.

b) Also, for any year of vacancy due to my Coop by law where I need to leave it empty every third year would I just treat those as "regular" rental years but with no income but still take depreciation and all the tax deductions (eg. monthly maintenance, property tax)?

Thank you very much in advance and Happy Holidays!

L

It’s called the non qualified use. And yes 9/18 years (counting all the years  as it was not your PR. Talk to your tax advisor with more detail on this )would be non qualified. Your roughly 50% gain has to be recognized.

Remaining gain will be sheltered under sec 121.

Also remember there is a depreciation recapture gain taxed up to 25%.