Wanting to sell our first rental. How to avoid capital gains tax

[Jameson Hedin]

My wife and I are wanting to sell our first rental. We bought it 5 years ago (October 2015) and lived in it the first 2 1/2 years. Can anybody help me with our capital gains tax situation? As I understand it we can reduce our taxable gain by 50% from living in it for 1/2 the time as long as we sell it by October. Is that correct? Also, for a married couple I believe the 15% tax kicks in around $78,000 joint income. Is that correct and is that before or after deductions when doing taxes? Thanks for any insight.

[Wayne Brooks]

Good news...Assuming it is a single family home (not a duplex, etc) your cap gains is exempt up to $500k even you’ve rented it for 2 1/2 years.  You meet the “lived in it for 2 out of the last 5 years”...which simply means you can’t rent it out for more than 3 years after you move out (after you lived in it for at least 2 years first).  You don’t have to prorate the gain for how long you lived in it verses how long you rented it.

As said, the cap gains will be exempt but you will have to pay depreciation recapture tax...that is you have to pay tax back on the depreciation you claimed/should have claimed for the 2 1/2 years you rented it out.  If you Didn’t claim depreciation, it will sort of be a wash since you can file the form to claim the deduction you should been taken, then turn around and claim that as income when you sell.