Moving Back Into Rental

Today TaxMama hears from Ron in Reno, who wants to know, “My wife and I have a rental house that we lived in from 1971 to 1979. We have rented it out ever since then.
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Can we rent out our present house and then move back into the rental for 2 yrs to convert it back into a personal? We want to sell it to avoid capital gains by using the personal residence exclusion.

Will this work?”

Dear Ron,

That’s a very good question.

That’s what we used to do, back in the old days before the Housing and Economic Recovery Act of 2008.

Since the new law went into effect on January 1, 2009, your $500,000 personal residence exclusion will be reduced. It was confusing at first, with all the experts unclear on the final interpretation of how the reduction will work. But, now we know.

Good news, it won’t be a big problem for you though. Read on. You will be using this formula to determine the reduction of the personal residence exclusion:

Months of Nonqualified Use/Months of Ownership = % to reduce the personal residence exclusion

The good news is that the Months of Nonqualified Use start on January 1, 2009. So you won’t have to be penalized for the months the house was rented from 1979 to 2008.

Since the months of ownership will be over 384 once you’ve lived in the house for another 2 years, your exclusion percentage will be very low. In fact, even if you move back in on December 31, 2009, you’d lose less than 3.

25% of your $500,000 personal residence exclusion.

And remember, you can find answers to all kinds of questions about the personal residence exclusion and other tax issues, free.
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Where? Where else? At

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