Taxing Personal to Rental Sale to Personal

[JIMBOBBNH]

A client built a new house, can't sell the old one (basis 50K/FMV 200K) due to market, decides to rent it. Hopes to sell in few years and still use 2/5 rule to avoid gains taxes. Hard to explain that tax laws can be so unfair, if she sold now she'd pocket the profit. If rented Deprec will be peanuts because of basis, but at sale Fed & State will have hand out. If she stops renting it before sale at what point would it be considered personal property and we only need to recapture Deprec ?

[erchess]

I think

that if the house has been rented for long enough that her personal use does not meet the 2/5 test then her persoonal use pre rental goes out the window and she has to re occupy the dwelling as her personal primary residence for at least two of the five years prior to sale. I think the tests would be the same as if she had never previously owned the property except that the IRS would make sure every requirement was met down to the last day and hour. The house she buillt and used as her residence during the period when the first house was rented would now be her second home and its mortgage and taxes would be dedictible on Sch A. Meanwhile it would be important for two years to the day that:

she get all mail at the old home including forwarding of mail sent to the newer place and only accounts specifically related to the newer place such as its mortgaqge have it as her address in the first place;

all professionals with whom she deals have the older place as her address in their files; and

the older place determines her residence for political purposes such as voting and attending party precinct meetings.

[joanmcq]

OP, your client has three years to rent it and hope the market turns around. Why are you worrying now? Rent it for 2 years, pocket the rent, sell it. Pocket gain. Not that bad of a problem, if you ask me.

[snowshine]

Two things to remember here:
1) She will need to recapture depreciation no matter what she does, and
2) Under the new exclusion rules her ability to exclude profit on the sale is decreasing every day she does not use it as her primary home. While it is likely that there is no profit today, in 2 or 3 years she could end up with a significant tax liability.

[solomon]

Two things to remember here:
1) She will need to recapture depreciation no matter what she does, and
2) Under the new exclusion rules her ability to exclude profit on the sale is decreasing every day she does not use it as her primary home. While it is likely that there is no profit today, in 2 or 3 years she could end up with a significant tax liability.

This is unrecaptured 1250 gain taxed up to a maximum of 25% - not depreciation recapture. The non-qualified used rules do not apply when going from personal to rental. As joanmcq noted, the taxpayer has up to three years (after converting to rental) to sell the house while collecting rent and then using the §121 exclusion with the exception of unrecaptured 1250 gain.