Today TaxMama hears from Carrie in IL, who is confused. “I owned a home for 5 years. I lived in it for the first 3 years, then rented it out for the last two. This was also my first sale. I am told many things. Some say I will pay capital gains on the years I rented it (they consider that a business); Some say you don’t have to pay capital gains because you lived in it for 3 years as your primary residence.
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What is your opinion?”
Dear Carrie,
What are you looking for here, the best 2 out of 3 opinions; best 3 out of 5?
Why would you want anyone’s opinion?
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Wouldn’t you rather know what the Tax Code says?
It’s pretty straightforward, really.
Since you’ve lived in the property for 3 years out of the last five, before the sale – the house is treated as your personal residence. There is no capital gain on the sale of the house – as long as the profits are under $250,000 (or $500,000 per couple).
However, since you rented it out, you took deductions for depreciation. When you sell it, you have to pay tax on the depreciation – but only up to 25%, regardless of your tax bracket.
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You can read more about it, and use the timeline worksheet in IRS Publication 523.
https://www.irs.gov/publications/p523/ar02.html#d0e3775
I strongly urge you to have a tax professional prepare this tax return, to make sure you get this one right. It will save you a fortune in the long run.
And remember, you can find answers to all kinds of questions about selling real estate and other tax issues, free.
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Where? Where else? At TaxMama.com
- Ask TaxMama :: Where taxes are fun and answers are free
- www.TaxQuips.com :: The number ONE free tax podcast online
- RentalTaxes.com/ :: TaxMama’s Home Ownership and Rental FAQs
- IRS Publication 523 :: Selling a Mixed Use Residence
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