In the past, investors with large gains in rental properties would move in (or do a 1031 from a multiple-unit property into a single-family home and then move in after a “reasonable” amount of time) and claim them as their principal residence. Then two years later, they would sell the property and then would be able to have $250,000 (if single) to $500,000 (if married) in gain be tax-free. This would work even if the gain didn’t happen during the time they lived in the property as their principal residence.
However, a few years ago the tax law changed. Now, investors that implement this strategy will have to pro-rate the gain based on the percentage of time the property was owned as an investment vs. time owned as a principal residence.
If you rented out your property when you bought it, but then you live there for at least two years before you sell it, you can claim a portion of this exclusion if you owned the property for at least five years. Your exclusion is reduced by the amount of time the home served as an investment property. For example, if you owned the property for ten years, rented it out for six years, and lived in it for the last four years, it served as an investment property 60 percent of the time. Therefore, you may be able to exclude 40 percent of your gain from taxation.
So, if you had planned on using this strategy to lower your capital gains taxes on selling a rental property by moving into it, you need to contact your tax professional ASAP to see how this impacts your plans. The difference for an investor could be in the hundreds of thousands of dollars in gain moving from non-taxable to taxable.
I AM NOT A TAX EXPERT. PLEASE CONSULT A TAX PROFESSIONAL. If you have questions about real estate, call me at (925) 240-MOVE (6683). Voted “Best of Brentwood” multiple times. To search the MLS for free, go to: www.SharpHomesOnline.com. Sharp Realty. #01245186