Owe Capital Gain Tax On Primary Residence Converted Into A Rental?
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I bought a property in 2009 at $235,000 and made improvements worth $50,000. It was our primary residence from July 2009 until April 2015. As of May 2015, it became a rental property. Now we are thinking of putting the rental property on the market for about $450,000 and hoping it will sell in the next 5-6 months. I know I am looking at capital gains on the profit ($165,000). But based on IRS documentation, since it was our primary residence for at least 2 years in the last 5 years from the date of selling, I qualify for excluding this capital gain (i.e., I am not expected to pay any capital gains). Is my conclusion right? Or am I still liable to some percentage of capital gains given that it has been a rental property for over a year now? If it helps, my spouse and I file tax returns jointly, and we are based in Texas. Thanking you in advance.
— Bosco Iakov Filimonov/Shutterstock.com
Because your home was converted to a rental property, you may have to report a portion of the gain as income on your tax return as a result of the sale. You are correct that you will meet the IRS rule for excluding some of the gain on the sale of the property, as you owned the home and it was used as your main home for 2 of the last 5 years. However, because it was used a portion of the time as a rental property, additional rules come into play now. When you converted your home to rental property, along with your other rental expenses of property taxes, mortgage interest, insurance, etc., you were also allowed to claim a depreciation deduction which lets you deduct the cost of the property over time. When the property is sold, you may have to “recapture” a portion or all of the depreciation at ordinary income tax rates on your tax return. The balance of the taxable gain on the sale that is not taxed at ordinary income tax rates is taxed more favorably as a capital gain. RATE SEARCH: Thinking about buying rental property? Compare mortgage rates today at Bankrate.com!
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— Bosco Iakov Filimonov/Shutterstock.com
Because your home was converted to a rental property, you may have to report a portion of the gain as income on your tax return as a result of the sale. You are correct that you will meet the IRS rule for excluding some of the gain on the sale of the property, as you owned the home and it was used as your main home for 2 of the last 5 years. However, because it was used a portion of the time as a rental property, additional rules come into play now. When you converted your home to rental property, along with your other rental expenses of property taxes, mortgage interest, insurance, etc., you were also allowed to claim a depreciation deduction which lets you deduct the cost of the property over time. When the property is sold, you may have to “recapture” a portion or all of the depreciation at ordinary income tax rates on your tax return. The balance of the taxable gain on the sale that is not taxed at ordinary income tax rates is taxed more favorably as a capital gain. RATE SEARCH: Thinking about buying rental property? Compare mortgage rates today at Bankrate.com!