Today TaxMama® hears from KW who is selling his former residence. He wants to know if the residence he bought in 1991 and converted to a rental in 2007 still qualifies for the personal residence exclusion of $250,000?
Dear KW,
Since you have not lived in that home for well over 5 years, the entire gain is taxable. There is no way to exclude any gain.
Your basis in the home has nothing to do with the mortgage. The fact that you have such a high mortgage only means that you pulled a lot of money out, tax-free at some point. So you have already gotten some significant cash from this house.
Your basis (tax cost) will be something like this:
Purchase price $43,000
Less Depreciation you’ve taken since 2007 (about) $12,000
Or approx $31,000
If you sell it for $170K after fees, your taxable profit will be $139K.
You can use a tax calculator like the one TurboTax or H&R Block has to figure out your IRS taxes on the sale. They are apt to be less than $25,000 + whatever your state tax rate turns out to be.
https://turbotax.intuit.com/tax-tools/calculators/taxcaster/
https://www.hrblock.com/tax-calculator/#/en/te/aboutYou
You will still have plenty of money after the mortgage and taxes are paid. BUT…I am only giving you very broad information based on what you said. It might be a good idea to sit down with a tax professional immediately to see if you have any alternatives or other reductions that they can discern, OR if it is to your advantage to make it a tax-free exchange or an installment sale.
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