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Not sure if this should be in this forum, or maybe under investing?
But, we currently own a home that is about 3/4 paid off and have lived there for about 3 years. It's in a good location and is part of a large subdivision that is about half built out. As the subdivision grows and new phases are built, I am assuming property values will continue to increase. (barring an economic collapse or any unusual economic situations.) Not that Zillow is accurate, but the Z-Estimate on our home has increased by 80,000 to 90,000 in those 3 years because the comps in the neighborhood keep increasing in price as the area gets built out.
We have a job opportunity that would have us relocate to another part of Connecticut. Wanted to get an idea of the tax implications of keeping the current home and renting it out for another 2-3 years before selling. (Yes, CT is a small state, but it would be well over an hour increase in commuting time if we did not relocate
1) The easiest thing to do would be to sell the current home and use the equity to buy a nice home in the new area.
2) However, if the area where our current home is located continues to grow, it could be a good long term investment to keep our current home as a second home. We could rent it out - comps for home rentals in our area would allow us to cover the remaining mortgage payments, plus property taxes & home insurance +/- $100/month. What would be the tax implications of doing this and selling the home down the road in 2-3-4 years when the subdivision is at or near completion? Any ideas? I think the home would lose "second home" status and we'd maybe lose some deductions as well as paying capital gains if we sold the home?
3) If the tax implications are too serious, we'd have to cover the mortgage, property taxes and insurance, as well as maintenance of the home for letting it sit and maybe using it a few times a year. We could do that, but it would mean not getting as nice a home as we wanted in our new area. Might as well sell in this case, I think?
This is one of those times you need to consult a CPA or attorney who does this for a living and is an expert in real estate tax. There is a massive amount of misinformation posted on these boards regarding taxes. I'm not even sure if the above is true anymore if you rent your property out, because they changed the rules awhile back. I posted a link to an IRS publication regarding cap gains in another thread, I think it was IRS publication 923 or 953
it is true. it must be your primary for 2 out of a 5 year rolling period to get the exclusion. that has not changed. what changed is treatment of a rental or 2nd home you make your primary after the fact..
Thanks - never heard of the rolling 5 year window. I had thought if we rented for more than 14 days, we'd lose any advantages of the second home as it would shift to a rental property.
it is true. it must be your primary for 2 out of a 5 year rolling period to get the exclusion. that has not changed. what changed is treatment of a rental or 2nd home you make your primary after the fact..
You're right the 2/5 year exclusion hasn't changed for primary residence. But now I think the capital gains exclusion is prorated for any time it was a rental after 1/1/09. Doesnt matter if you move back in or not. Like I said, I would strongly encourage people to get their info from a tax professional, not anonymous msg boards. Or at least read the IRS publications themselves.
You're right the 2/5 year exclusion hasn't changed for primary residence. But now I think the capital gains exclusion is prorated for any time it was a rental after 1/1/09. Doesnt matter if you move back in or not. Like I said, I would strongly encourage people to get their info from a tax professional, not anonymous msg boards. Or at least read the IRS publications themselves.
^^^^This. The IRS website has come a long way in the past few years IMO, and is now easy to use and understand in most cases.
You're right the 2/5 year exclusion hasn't changed for primary residence. But now I think the capital gains exclusion is prorated for any time it was a rental after 1/1/09. Doesnt matter if you move back in or not. Like I said, I would strongly encourage people to get their info from a tax professional, not anonymous msg boards. Or at least read the IRS publications themselves.
the prorating now refers to when you own a rental or 2nd home like we did and intend to make it a primary down the road say at retirement.
if you bought the house and it wasn't your primary day one then the number of years you owned it prior to your making it a primary is prorated.
so if you bought the rental or 2nd home 7 years ago but it served as your primary the last 3-1/2 you would only get 1/2 the tax free exclusion if you sold it at a profit..
Last edited by mathjak107; 04-19-2015 at 09:20 AM..
Thanks - I wanted to get some ideas about it first before I consulted a professional. Looking online at the IRS, or various other sites, can be confusing as there is just so much info out there.
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