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Old 02-12-2012, 01:12 PM
 
Location: Chapel Hill, NC (formerly Vienna, VA)
5,623 posts, read 5,419,193 times
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Default Tax consequences of renting out our primary residence?

My family and I recently moved from Northern Virginia (outside DC) to North Carolina for my husband's job relocation. Ever since we found out about the relocation back in July we were waffling back and forth between renting vs. buying in NC and renting vs. selling in NoVA. But the rental market in NC was expensive and the right house came along for sale so we bought. Up until last week, we were planning on putting the house in NoVA on the market within a month. Now, after living here for two weeks, I'm thinking maybe we should rent our our home in NoVA JUST IN CASE we decide to move back (I really miss the traffic there .)

So, are there any tax or other financial consequences to this decision? If we sell our house in NoVA today, we would profit about $250K. We've lived in the house for the past 11 years. I believe we can avoid the capital gains tax if we have lived in the house at least 2 of the previous 5 years. So, if I understand it right, we'd need to sell the house within 3 years if we decide we're not going back. Correct? Any other tax or other financial consequences I don't know about?
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Old 02-12-2012, 01:57 PM
 
590 posts, read 905,312 times
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You can exclude the gain on the sale of your home $250,000 for singles or $500,000 for married if you've lived in it 2 of the past 5 years.

If you rent, you use Schedule E to declare your rental income and expenses which include depreciation, utilities, insurance, repairs, and travel that you could not claim if you did not rent it. The income minus expenses is taxed at your normal income tax rate whether or not there is a loss or gain. As a rental, mortgage interest and property taxes that you are probably declaring on Schedule A would be moved to Schedule E. You must depreciate the house each year and when you sell you will pay capital gains on the depreciation amount you previously claimed at the 25% rate. If you do not depreciate each year, you will still have to pay the 25% on recapture as if you had depreciated when you sell it.

If you decide to rent it out long enough that you no longer qualify for the 2 of 5 year exclusion, you pay capital gains when you sell.

You can rent it out and then move back into the house without any tax penalties.

Maintaining a home long distance can be a headache unless you have good renters. Unless you have family or friends in NoVA that you think you'll miss, or you get transferred back because of work, it is highly unlikely that you will ever move back to VA.

Last edited by md21722; 02-12-2012 at 02:06 PM..
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Old 02-12-2012, 08:13 PM
 
2,185 posts, read 1,907,562 times
Reputation: 1753
Quote:
Originally Posted by md21722 View Post
You can exclude the gain on the sale of your home $250,000 for singles or $500,000 for married if you've lived in it 2 of the past 5 years.

If you rent, you use Schedule E to declare your rental income and expenses which include depreciation, utilities, insurance, repairs, and travel that you could not claim if you did not rent it. The income minus expenses is taxed at your normal income tax rate whether or not there is a loss or gain. As a rental, mortgage interest and property taxes that you are probably declaring on Schedule A would be moved to Schedule E. You must depreciate the house each year and when you sell you will pay capital gains on the depreciation amount you previously claimed at the 25% rate. If you do not depreciate each year, you will still have to pay the 25% on recapture as if you had depreciated when you sell it.

If you decide to rent it out long enough that you no longer qualify for the 2 of 5 year exclusion, you pay capital gains when you sell.

You can rent it out and then move back into the house without any tax penalties.

Maintaining a home long distance can be a headache unless you have good renters. Unless you have family or friends in NoVA that you think you'll miss, or you get transferred back because of work, it is highly unlikely that you will ever move back to VA.
Good information. I am in the same position.
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Old 02-13-2012, 02:51 AM
 
27,204 posts, read 22,654,172 times
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check your insurance policies. many will only insure you under homeowners while trying to rent after you move out for 3 to 6 months if the home is vacant. after that they consider it a vacant home and you may have trouble collecting for some claims. i happen to see in my geico/travelers policy they will go 3 months after i move out while trying to rent it..

as i discussed many times in these threads dont use ho3 homeowners insurance which is for owner occupied homes for rentals.

you need landlord insurance or you give the insurance company latitude to deny claims related to vandalism or tenant damages.
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Old 02-13-2012, 05:42 AM
 
Location: Chapel Hill, NC (formerly Vienna, VA)
5,623 posts, read 5,419,193 times
Reputation: 4029
Quote:
Originally Posted by mathjak107 View Post
check your insurance policies. many will only insure you under homeowners while trying to rent after you move out for 3 to 6 months if the home is vacant. after that they consider it a vacant home and you may have trouble collecting for some claims. i happen to see in my geico/travelers policy they will go 3 months after i move out while trying to rent it..

as i discussed many times in these threads dont use ho3 homeowners insurance which is for owner occupied homes for rentals.

you need landlord insurance or you give the insurance company latitude to deny claims related to vandalism or tenant damages.
My husband is a property/casualty insurance underwriter, so we are actually knowledgeable about that part of the equation. Thanks for bringing it up, though, as I need to have him find out what our increase in policy costs will be. Thanks!
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Old 02-13-2012, 05:43 AM
 
Location: Chapel Hill, NC (formerly Vienna, VA)
5,623 posts, read 5,419,193 times
Reputation: 4029
Quote:
Originally Posted by md21722 View Post
You can exclude the gain on the sale of your home $250,000 for singles or $500,000 for married if you've lived in it 2 of the past 5 years.

If you rent, you use Schedule E to declare your rental income and expenses which include depreciation, utilities, insurance, repairs, and travel that you could not claim if you did not rent it. The income minus expenses is taxed at your normal income tax rate whether or not there is a loss or gain. As a rental, mortgage interest and property taxes that you are probably declaring on Schedule A would be moved to Schedule E. You must depreciate the house each year and when you sell you will pay capital gains on the depreciation amount you previously claimed at the 25% rate. If you do not depreciate each year, you will still have to pay the 25% on recapture as if you had depreciated when you sell it.

If you decide to rent it out long enough that you no longer qualify for the 2 of 5 year exclusion, you pay capital gains when you sell.

You can rent it out and then move back into the house without any tax penalties.

Maintaining a home long distance can be a headache unless you have good renters. Unless you have family or friends in NoVA that you think you'll miss, or you get transferred back because of work, it is highly unlikely that you will ever move back to VA.
Thanks for this good information. How do you determine depreciation % on a house?
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Old 02-13-2012, 09:57 AM
 
590 posts, read 905,312 times
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First you separate the cost of the land and the structures. According to the IRS land is never depreciated because it never wears out. You can use any reasonable method to separate the cost. For example, the last property tax bill will list the value of the land and the value of the structure. You calculate the ratio by dividing structures by the total assessment. Another place to get it is from the appraisal. Calculate the ratio by dividing the structures by the total value. As an example, say the property tax bill said land 50,000 structure 150,000. Then your ratio is 150000/200000 = 75%.

Next you have to determine the adjusted cost. The adjusted cost is the purchase price plus closing costs that you would have paid if you bought the property with cash plus capital improvements since you purchased the house. In other words you cannot deduct any loan costs such as mortgage deed recording, origination fee, or any bank fees. Lets say you bought the cost for $195,000 and with closing costs it came to $200,000. Then your "basis for depreciation is 200,000 x 75% = 150000.

Next you determine the fair market value (FMV) at the time of conversion. This is what it would sell for if it sold at the time of conversion.

The IRS says you use the LESSER of the FMV or the purchase price. Then you use the Residental Rental Property 27.5-year S/L method of depreciation. The first year you prorate based on the month you placed the rental in service. The following years are generally 3.636%. Note that as soon as you advertise or list the property for rent you "placed it in service". You don't actually have to rent it at that time. (The same applies of insurance, utilities, etc.) If you don't get it rented for 2-3 months its OK.

Once you have that figured out you record it on Form 4562.

All of this information is in IRS publication 527 "Residential Rental". Also read through IRS publication 523 "Selling your home" so you can become aware of what happens when you sell the rental.
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Old 02-13-2012, 10:27 AM
 
Location: Chapel Hill, NC (formerly Vienna, VA)
5,623 posts, read 5,419,193 times
Reputation: 4029
Quote:
Originally Posted by md21722 View Post
First you separate the cost of the land and the structures. According to the IRS land is never depreciated because it never wears out. You can use any reasonable method to separate the cost. For example, the last property tax bill will list the value of the land and the value of the structure. You calculate the ratio by dividing structures by the total assessment. Another place to get it is from the appraisal. Calculate the ratio by dividing the structures by the total value. As an example, say the property tax bill said land 50,000 structure 150,000. Then your ratio is 150000/200000 = 75%.

Next you have to determine the adjusted cost. The adjusted cost is the purchase price plus closing costs that you would have paid if you bought the property with cash plus capital improvements since you purchased the house. In other words you cannot deduct any loan costs such as mortgage deed recording, origination fee, or any bank fees. Lets say you bought the cost for $195,000 and with closing costs it came to $200,000. Then your "basis for depreciation is 200,000 x 75% = 150000.

Next you determine the fair market value (FMV) at the time of conversion. This is what it would sell for if it sold at the time of conversion.

The IRS says you use the LESSER of the FMV or the purchase price. Then you use the Residental Rental Property 27.5-year S/L method of depreciation. The first year you prorate based on the month you placed the rental in service. The following years are generally 3.636%. Note that as soon as you advertise or list the property for rent you "placed it in service". You don't actually have to rent it at that time. (The same applies of insurance, utilities, etc.) If you don't get it rented for 2-3 months its OK.

Once you have that figured out you record it on Form 4562.

All of this information is in IRS publication 527 "Residential Rental". Also read through IRS publication 523 "Selling your home" so you can become aware of what happens when you sell the rental.
Wow! Thanks a lot for all of the good information and the direction on where to find out more. Beyond the emotional/logical reasons for possibly wanting to rent out the VA house, I am trying to do a financial comparison of selling versus renting, and I did not know the intricate details about depreciating the property. In VA by law, properties get a tax assessment each year, so I know the current ratio of the value of the house to the total assessment (44%). And I will go forward from there. Sounds like doing my taxes is going to be a lot of fun next year if we proceed with a rental!
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Old 02-14-2012, 09:13 AM
jw2
 
944 posts, read 686,615 times
Reputation: 1311
Quote:
Originally Posted by michgc View Post
Wow! Thanks a lot for all of the good information and the direction on where to find out more. Beyond the emotional/logical reasons for possibly wanting to rent out the VA house, I am trying to do a financial comparison of selling versus renting, and I did not know the intricate details about depreciating the property. In VA by law, properties get a tax assessment each year, so I know the current ratio of the value of the house to the total assessment (44%). And I will go forward from there. Sounds like doing my taxes is going to be a lot of fun next year if we proceed with a rental!
md21722 did an admirable job explaining it. There are so many little pieces to this that you just won't be able to get on a forum. I would recommend this book Every Landlord's Tax Deduction Guide - Nolo
You can get the ebook version right away and have it finished by the end of the weekend.
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Old 05-18-2014, 05:09 PM
 
1 posts, read 1,618 times
Reputation: 10
I paid 270k for my primary residence and lived in it for 6 years. Fmv was 208k when I converted it to a rental. I rented it out for 2 years and then sold it for 238k.

My question is, do I need to report a gain on the sale?
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