Selling Rental House


Today TaxMama hears from Debra in the TaxQuips Forum who wants to know. “How can I sell my rental home without paying taxes on the profit?” (Actually, the question is much longer. You can read the details, here.)


Dear Debra,

Being age 59 isn’t old these days. It’s just about the prime of life!

Managing a rental property with only one tenant should not take any effort at all. Screen your new tenant very well – and all you have to do is collect the rent on time and call a repair service once in a while, if needed. But, if you don’t want to do that?

Then sell the house you’re living in now. You already know you won’t have any taxes on the sale of that one. Yes, you can move into the rental house. Live in it for two years – and you can sell it without paying taxes on the capital gains. However, you will pay tax on the depreciation you have taken while it was a rental.

By this time, you will have taken nearly 20 years of depreciation out of 27.5. So most of the value of the building will have been depreciated. I suspect, that no matter what you do, your minimum IRS taxes will be about $6,000 when you sell that property.

As to the capital gains taxes, if you sell the property in 2012, you’re likely to pay between 0% and 15% on the rest of the profits (about another $25,000 – $30,000 profit, I am guessing), plus state taxes.

You may want to have someone run the numbers for you to see what your taxes actually would be if you were to sell in 2012. (The rates may go up after 2012.) You may find that, aside from the taxes on the depreciation, your capitals gains costs will be less than the cost of selling your home and moving to the rental property.

Speak to a local tax professional and get guidance on your specific situation. I suspect you can sell the house without much of a tax hit.


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