Exclude capital gains on that rental by moving in?

So you have a property that you have been renting and even at today’s value has a market value higher than your basis; how can you minimize some of that gain?  Prior to December 31, 2008 there was a significant ability to reduce those gains by just moving in for two years.  In fact, if you were married you could have exempted yourself from capital gains on a whopping $500,000 of equity build-up.  Just in time for the market melt-down Congress reduced the sweetener though.

Prior to passage of the Housing Assistance Tax Act of 2008 (H.R. 3221) you only needed to live in the property as your personal residence for any two of five years that you owned the property and you could exempt up the full amount of exclusion.  The two years could be any of the five years in any combination:  live in the property for two years and rent for three years, rent the property for three years and then move in for two, or even live there every other year of the five if you really liked moving.

Under H.R. 3221 the period of time the property is not used as your personal residence is termed “non-qualifying use.”  The ratio of non-qualifying use compared to the 5-year time frame reduces the amount of gain that can be excluded.  For example, John who is married and files jointly lives in a property for 2 years of the 4 years he owns the property.  Fifty percent of the time is non-qualifying use so his gain of $100,000 would only be excludable up to $50,000 and he would owe capital gains on the balance.  If he had owned the property for five years; rather than four, his exclusion percentage would have increased to 60% leaving capital gains due on $60,000.

Bryan L. Wakefield, MS Acct.

Principal, Corridor Tax & Accounting, LLC

1020 Philip Powers Dr., Laurel, MD 20707

Office: (410) 630-1538  | Fax: (410) 630-1652

BWakefield@CorTaxAct.com | www.CorTaxAct.com

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