Today TaxMama hears from Rhonda in Florida with this dilemma. “I purchased a condo in Florida in 1996. It was my primary residence for about 5 years. Then I got married, moved in to my husband’s condo and rented mine out. It was a rental property for the past 5 years. Since I originally purchased the condo as a primary residence, will I have to pay a 15% +/- capital gains tax should I decide to sell? Or is there any way to exclude any of the gains?”
Hi Rhonda,
Oh, how I wish you had asked this question a couple of years ago.
Since you’ve let the full five years lapse since you’ve lived in it, it’s not longer qualified for the personal residence exclusion. Not even a little bit.
You have three choices now:
Sell it and pay the taxes, or
Move back into the condo for two years, then sell it and pay nothing.
Do a 1031 exchange and pay no taxes, for now.
If I were in your shoes, it would depend on just how much tax I had to give up to sell it now.
If the tax is less than I could earn on the money without totally inconveniencing myself, I’d just sell it and re-invest the money. After all, the tax rate on the profits will only be 15% – and no state tax in Florida. You will have to pay a little more tax on the part of the gain related to depreciation – 25%. But, even on $10,000 worth of depreciation – that’s only $2,500.
Read more about it here in IRS Publication 523
If the tax is huge – like $50,000 or more. That’s incentive to move in for a couple of years.
Only what do you do with the house you’re living in now?
Empty out anything precious and irreplaceable – and rent it out.
And remember, you’ll find answers to lots of questions about selling homes and other tax information, free. Where? At TaxMama.com
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