Is it Time to Sell That Temporary Rental?
July 17, 2018 | Tom Ashworth
Many homeowners were not able to sell their homes during the recession are thinking about rental property. They may have been transferred to a new location and stuck with a home they could not sell. In many cases the rent covered the mortgage, so they did not need to sell.
This is a great strategy but could have huge tax ramifications later.
Section 121 exclusion for gain from a principal residence requires that the home is used as a main home for at least two of the five year period ending with the sale of the home. This allows a homeowner to rent the home for up to 3 years and still get the 121 exclusion for gain in principal residence.
If you have a home with a $200,000 gain in price and it qualifies for the principal residence exemption in section 121, then you would pay no taxes. But if you had used it as a rental and it did not qualify it could cost you over $30k in higher tax liability.
The home market is improved over the last year. You home may be worth more and you have a gain and you have rented it for less than 3 years, you may want to sell the home so you can claim the homeowners exclusion.
IRS publication 523 outlines what qualifies for the exclusion. You need to consult with your tax professional for advice on your situation.
Please discuss this information with your tax advisor to see how it can apply to your situation. The purpose of this article is to make you aware of the strategy.
Tom Ashworth is a Licensed by the Texas Real Estate Commission. License # 623386.