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Old 01-22-2017, 12:23 PM
 
Location: Loudon, TN
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It's already a rental property and we wish to sell it and buy a vacation rental closer to us for a better income and an occasional getaway for ourselves.
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Old 01-22-2017, 01:13 PM
 
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Quote:
Originally Posted by cmarlin20 View Post
Do some research, you can't 1031 your personal residence. You can move out, convert to rental, then sell, exchange for rental, then again convert the rental to your personal residence. All this takes time, but if it is worth it to you, it may work out better.
the rules are different now. making something a rental then a primary gets prorated . it has been that way for years now .

so if something was owned for 10 years and it spent 6 years as a rental and 4 years as a primary you get only 40% of the exclusion
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Old 01-22-2017, 01:58 PM
 
Location: Haiku
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Quote:
Originally Posted by mathjak107 View Post
the rules are different now. making something a rental then a primary gets prorated . it has been that way for years now .

so if something was owned for 10 years and it spent 6 years as a rental and 4 years as a primary you get only 40% of the exclusion
That's not right. The only thing that matters is the previous 5 years. You have to have lived in the house for 2 of those 5 years and you can then claim the exemption.

Publication 523 - Selling Your Home
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Old 01-22-2017, 02:18 PM
 
71,517 posts, read 71,694,121 times
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Quote:
Originally Posted by cmarlin20 View Post
Do some research, you can't 1031 your personal residence. You can move out, convert to rental, then sell, exchange for rental, then again convert the rental to your personal residence. All this takes time, but if it is worth it to you, it may work out better.
Quote:
Originally Posted by TwoByFour View Post
That's not right. The only thing that matters is the previous 5 years. You have to have lived in the house for 2 of those 5 years and you can then claim the exemption.

Publication 523 - Selling Your Home



you need the section on converting a rental or 2nd home back to a primary .

once he converts it to a rental the conversion back to primary to claim the exclusion falls under different rules .

what you say is only true if he rents his primary and sells it within 5 years of living in the house as a primary . that is not what he was advised to do .

he was advised to go full circle . it was a primary - it was converted to a rental and now they are saying he should convert it back to a primary again . it is that last part that changes the game and the rules as the rules change when going from rental back to primary .

Prior to 2008 an owner of a rental home could move into that rental home as a principal residence for two years, and, upon the sale of the home after two years of residence, the entire capital gain on the sale for up to $500,000 for a married couple ($250,000 for a single person) would be exempt from income tax.

In 2008 this tax law changed. An owner is still required to live in the property for two or more years within the past five years to qualify for capital gain income tax benefits, however, no longer is the entire capital gain exempt from income tax. The new law requires a prorated calculation of the tax benefits based on the number of years owned as a rental home and the number of years owned as a principal residence. Therefore, if your rental home has been rented for eight years, and then becomes your principal residence for two years, only the time that the rental home was your principal residence would be eligible for the capital gain exemption. In other words, if you owned the rental home for ten years—eight years as a rental home and two years as a principal residence—only 2/10 of the $500,000 capital gain would be exempt from income tax. That amount would be $100,000.

once the rolling 5 year period elapses from his first stint as a primary it no longer counts as a primary for purposes of the calculation again . the prorating considers the first rolling 5 years no longer a primary if he missed the first rolling 5 year period .

so 4 years as a primary - 4 years as a rental -then 2 years as a primary again before it is sold would allow only 20% of the exclusion . only the 2 last years as a primary count since he missed the rolling 5 year first period . he owned it 10 years with only the last counted as primary for 20% of the exclusion .

this screwed us up when we bought our 2nd home in 2007. we were going to convert it to a primary when we retired and we did not realize we screwed up the exclusion by having it as a 2nd home or rental first .

be careful today when converting a rental or 2nd home to a primary , you can cheat yourself out of some of the tax free exclusion money if you buy to soon and later sell early on




http://www.nolo.com/legal-encycloped...residence.html

Last edited by mathjak107; 01-22-2017 at 03:16 PM..
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Old 01-22-2017, 03:41 PM
 
Location: Haiku
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You can believe what you want but I confirmed the rule with a CPA and filed our taxes according to the instructions in publication 523. The instructions are very clear that if you meet the Eligibility Test, you use the gain/loss calculator on page 7. This calculator does not prorate the exemption. The Eligibility Test does not look back beyond 5 years. If you don't meet the Eligibility Test, then you are thrown into the pro-rated calculation which does look back beyond 5 years.

I am going to side with the IRS publication (and a CPA) on this rather than something I read on the Internet.
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Old 01-22-2017, 03:48 PM
 
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you are wrong . if you are talking about specifically converting a rental to a primary you better get another accountant . you can google it if you want .

you are not talking about the same issue if you are talking converting a primary to a rental . it is not the same as a primary to a rental which you can do and get the full exclusion if done in a rolling 5 year period .. a rental to primary has different rules whether you want to believe it or not .

i am serious , if your accountant is telling you something else you better get another guy . the law for conversions from rental to primary was changed in 2008 . primary to rental rules stayed the same .

Last edited by mathjak107; 01-22-2017 at 03:58 PM..
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Old 01-22-2017, 04:08 PM
 
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perhaps you want to show the amendment to irs rule 121 to your accountant because he is behind the times if he does not know this , but i doubt it , i tend to think it is only on your side . . so here is the irs change . .



Changes to Section 121
The Housing and Economic Recovery Act of 2008 amends Section 121 of the Internal Revenue Code. Section 121 no longer permits homeowners to take the full tax-free exclusion on the sale of real property that was held and used as their primary residence if there was any non-qualified use of the real property prior to it being held and used as their primary residence.

Qualified and Non-Qualified Use
Qualified use is defined as any use of the property as a primary residence. Non-qualified use is defined as any use of the property other than as a primary residence, including use as a second home, a vacation property, a rental or investment property or use in a trade or business.

Gain Can Not Be Excluded for Non-Qualified Use
Homeowners can no longer take the full tax free exclusion under Section 121 when the property was held and used for non-qualified use prior to it being held and used as a primary residence (qualified use).

The capital gain resulting from the sale of the property will be allocated between qualified and non-qualified use periods based upon the amount of time the property was held and used for qualified versus non-qualified use.

The capital gain allocated to the non-qualified use period will no longer be excluded from the homeowner’s taxable income. The capital gain allocated to the qualified use period (time used as a primary residence) will continue to qualify for the 121 exclusion and will be excluded from the homeowner’s taxable income.

However, non-qualified use after the property was held and used as a primary residence will not count against the homeowner as long as the homeowner still qualifies for the 121 exclusion (see Exceptions to Non-Qualified Use). Homeowners that still qualify for the 121 exclusion will still receive the full tax free exclusion under Section 121.

Allocation of Capital Gain between Qualified and Non-Qualified Use Periods
Homeowners do not need to determine when the subject property actually appreciated or depreciated in value. There are no appraisals needed or required. The change or fluctuation in the fair market value of the property each year during the time they owned it doesn't matter. The total capital gain recognized upon the actual sale of the property is all that matters.

The total capital gain recognized upon sale will be allocated between qualified and non-qualified use periods in order to determine the amount of gain to be excluded from taxable income under Section 121 of the Internal Revenue Code due to qualified use, and the corresponding amount of capital gain that will be included in taxable income (not excluded) under Section 121 due to non-qualified use.

The allocation of the gain between qualified and non-qualified use periods is actually very simple. Gain is allocated using a formula or fraction based on the number of years the property was held for qualified use versus the number of years the property was held for non-qualified use as a percentage of the total number of years the property was owned by the homeowner.

Example
A homeowner owned real property for ten (10) years. It was held as rental property for the first eight (8) years and then converted to their primary residence for the last two (2) years. The non-qualified use period is eight (8) years and the qualified use period is two (2) years.

In this example, 2/10ths of the total actual capital gain can be excluded from taxable income as qualified use under Section 121 and 8/10ths of the actual total capital gain must be included (not excluded) in the homeowner’s taxable income as non-qualified use under Section 121.

Remember that any depreciation recapture can not be excluded from taxable income under Section 121 and would be recognized and included in the year the property is actually sold. In this example, the depreciation taken over the eight (8) year period while the property was held for investment will be recaptured and taxable in the last year when the property is actually sold.

Exceptions to Non-Qualified Use
The Housing and Economic Recovery Act of 2008 has provided three (3) exceptions to homeowners where the sale of their primary residence may not otherwise qualify for the tax free exclusion under the new requirements now included in Section 121.

The first exception will have the greatest impact. Homeowners can move out of their primary residence and convert it to any other non-qualified use such as rental, investment, vacation, or business use property and still qualify for the tax free exclusion under Section 121.

The key is that homeowners must still qualify for the other requirements under Section 121 at the time they close on the sale of their primary residence. They must have (1) owned and (2) lived in the real property as their primary residence for at least a combined total of 24 months out of the last 60 months (two out of the last five years) in order to qualify for 121 exclusion treatment.
This also means that Revenue Procedure 2005-14 still applies and that homeowners can also complete a 1031 exchange to defer any balance of capital gains above the 121 exclusion limitations.
The second exception involves those homeowners affected by qualified official extended duty such as military service.
The third exception involves unforeseen circumstances.
Summary of Changes
Property Held For Rental or Investment First
Property held for investment purposes and then subsequently converted into a primary residence will be impacted the most under these legislative changes to Section 121.

The amount of time that the real property was held as investment property (non-qualified use) will no longer qualify for tax free exclusion under Section 121. Only the actual time that the real property was held and used as a primary residence (qualified use) will qualify for the tax free exclusion.

This will significantly affect those homeowners who had planned to move into investment property and convert its usage to their primary residence in order to take advantage of the 121 exclusion. The longer the real property was held for investment the greater the impact will be on the amount of capital gain that can be excluded from taxable income (i.e. the more capital gain that must be included in taxable income).

Property Held As Primary Residence First
The modifications made to Section 121 do not affect homeowners that move out of their primary residence and convert it to non-qualified use. The homeowner can still take the full amount of the 121 exclusion upon the sale of the property as long as they still qualify for the 121 exclusion.

In other words, a primary residence that is subsequently converted into investment property will still qualify for the tax free exclusion under Section 121 provided the property is sold no later than three (3) years after its conversion to investment property. The property will no longer qualify for the 121 exclusion once it has been held by the homeowner as investment property beyond the three (3) year window.

Effective Date of Changes
The modifications to Section 121 of the Internal Revenue Code apply to the sale of any real property closing after December 31, 2008 that was held and used as the homeowner’s primary residence.

Transitional Period
The Housing and Economic Recovery Act of 2008 provides a very generous transition period to help homeowners plan for the modifications to Section 121. Any and all non-qualified use of the property prior to January 1, 2009 will not be taken into account and is ignored for 121 exclusion treatment; only the non-qualified use of the property after December 31, 2008 will affect homeowners.

Example
Kimberly buys her property on January 1, 2009 for $400,000 and leases it out for two (2) years. Kimberly claims $20,000 of depreciation deductions for those two (2) years. On January 1, 2011, Kimberly converts the property and begins to use the property as her primary residence. Kim moves out of her property on January 1, 2013, and subsequently sells it for $700,000 on January 1, 2014.

The period from 2009 through 2010 is non-qualified use of the property because it was held as investment (rental) property. The year 2013, after Kimberly moved out, is treated as qualified use of the property because of the exception provided in the Housing and Economic Recovery Act of 2008 as discussed above.

Out of the $300,000 capital gain, 40 percent or 2/5ths (two years out of five years owned), or $120,000, is not eligible for the tax free exclusion. The balance of the capital gain, or $180,000, may be excluded tax free under Section 121. The $20,000 gain attributable to the depreciation deductions is recaptured, as required under current law.

Last edited by mathjak107; 01-22-2017 at 04:17 PM..
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Old 01-22-2017, 04:20 PM
 
249 posts, read 196,990 times
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Quote:
Originally Posted by TheShadow View Post
It's already a rental property and we wish to sell it and buy a vacation rental closer to us for a better income and an occasional getaway for ourselves.
Yes, after I posted, I added I misread your post but I guess it didn't post. Nice to get a good new rental and a good getaway at the same time.
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Old 01-23-2017, 03:38 AM
 
71,517 posts, read 71,694,121 times
Reputation: 49095
Quote:
Originally Posted by mathjak107 View Post
perhaps you want to show the amendment to irs rule 121 to your accountant because he is behind the times if he does not know this , but i doubt it , i tend to think it is only on your side . . so here is the irs change . .



Changes to Section 121
The Housing and Economic Recovery Act of 2008 amends Section 121 of the Internal Revenue Code. Section 121 no longer permits homeowners to take the full tax-free exclusion on the sale of real property that was held and used as their primary residence if there was any non-qualified use of the real property prior to it being held and used as their primary residence.

Qualified and Non-Qualified Use
Qualified use is defined as any use of the property as a primary residence. Non-qualified use is defined as any use of the property other than as a primary residence, including use as a second home, a vacation property, a rental or investment property or use in a trade or business.

Gain Can Not Be Excluded for Non-Qualified Use
Homeowners can no longer take the full tax free exclusion under Section 121 when the property was held and used for non-qualified use prior to it being held and used as a primary residence (qualified use).

The capital gain resulting from the sale of the property will be allocated between qualified and non-qualified use periods based upon the amount of time the property was held and used for qualified versus non-qualified use.

The capital gain allocated to the non-qualified use period will no longer be excluded from the homeowner’s taxable income. The capital gain allocated to the qualified use period (time used as a primary residence) will continue to qualify for the 121 exclusion and will be excluded from the homeowner’s taxable income.

However, non-qualified use after the property was held and used as a primary residence will not count against the homeowner as long as the homeowner still qualifies for the 121 exclusion (see Exceptions to Non-Qualified Use). Homeowners that still qualify for the 121 exclusion will still receive the full tax free exclusion under Section 121.

Allocation of Capital Gain between Qualified and Non-Qualified Use Periods
Homeowners do not need to determine when the subject property actually appreciated or depreciated in value. There are no appraisals needed or required. The change or fluctuation in the fair market value of the property each year during the time they owned it doesn't matter. The total capital gain recognized upon the actual sale of the property is all that matters.

The total capital gain recognized upon sale will be allocated between qualified and non-qualified use periods in order to determine the amount of gain to be excluded from taxable income under Section 121 of the Internal Revenue Code due to qualified use, and the corresponding amount of capital gain that will be included in taxable income (not excluded) under Section 121 due to non-qualified use.

The allocation of the gain between qualified and non-qualified use periods is actually very simple. Gain is allocated using a formula or fraction based on the number of years the property was held for qualified use versus the number of years the property was held for non-qualified use as a percentage of the total number of years the property was owned by the homeowner.

Example
A homeowner owned real property for ten (10) years. It was held as rental property for the first eight (8) years and then converted to their primary residence for the last two (2) years. The non-qualified use period is eight (8) years and the qualified use period is two (2) years.

In this example, 2/10ths of the total actual capital gain can be excluded from taxable income as qualified use under Section 121 and 8/10ths of the actual total capital gain must be included (not excluded) in the homeowner’s taxable income as non-qualified use under Section 121.

Remember that any depreciation recapture can not be excluded from taxable income under Section 121 and would be recognized and included in the year the property is actually sold. In this example, the depreciation taken over the eight (8) year period while the property was held for investment will be recaptured and taxable in the last year when the property is actually sold.

Exceptions to Non-Qualified Use
The Housing and Economic Recovery Act of 2008 has provided three (3) exceptions to homeowners where the sale of their primary residence may not otherwise qualify for the tax free exclusion under the new requirements now included in Section 121.

The first exception will have the greatest impact. Homeowners can move out of their primary residence and convert it to any other non-qualified use such as rental, investment, vacation, or business use property and still qualify for the tax free exclusion under Section 121.

The key is that homeowners must still qualify for the other requirements under Section 121 at the time they close on the sale of their primary residence. They must have (1) owned and (2) lived in the real property as their primary residence for at least a combined total of 24 months out of the last 60 months (two out of the last five years) in order to qualify for 121 exclusion treatment.
This also means that Revenue Procedure 2005-14 still applies and that homeowners can also complete a 1031 exchange to defer any balance of capital gains above the 121 exclusion limitations.
The second exception involves those homeowners affected by qualified official extended duty such as military service.
The third exception involves unforeseen circumstances.
Summary of Changes
Property Held For Rental or Investment First
Property held for investment purposes and then subsequently converted into a primary residence will be impacted the most under these legislative changes to Section 121.

The amount of time that the real property was held as investment property (non-qualified use) will no longer qualify for tax free exclusion under Section 121. Only the actual time that the real property was held and used as a primary residence (qualified use) will qualify for the tax free exclusion.

This will significantly affect those homeowners who had planned to move into investment property and convert its usage to their primary residence in order to take advantage of the 121 exclusion. The longer the real property was held for investment the greater the impact will be on the amount of capital gain that can be excluded from taxable income (i.e. the more capital gain that must be included in taxable income).

Property Held As Primary Residence First
The modifications made to Section 121 do not affect homeowners that move out of their primary residence and convert it to non-qualified use. The homeowner can still take the full amount of the 121 exclusion upon the sale of the property as long as they still qualify for the 121 exclusion.

In other words, a primary residence that is subsequently converted into investment property will still qualify for the tax free exclusion under Section 121 provided the property is sold no later than three (3) years after its conversion to investment property. The property will no longer qualify for the 121 exclusion once it has been held by the homeowner as investment property beyond the three (3) year window.

Effective Date of Changes
The modifications to Section 121 of the Internal Revenue Code apply to the sale of any real property closing after December 31, 2008 that was held and used as the homeowner’s primary residence.

Transitional Period
The Housing and Economic Recovery Act of 2008 provides a very generous transition period to help homeowners plan for the modifications to Section 121. Any and all non-qualified use of the property prior to January 1, 2009 will not be taken into account and is ignored for 121 exclusion treatment; only the non-qualified use of the property after December 31, 2008 will affect homeowners.

Example
Kimberly buys her property on January 1, 2009 for $400,000 and leases it out for two (2) years. Kimberly claims $20,000 of depreciation deductions for those two (2) years. On January 1, 2011, Kimberly converts the property and begins to use the property as her primary residence. Kim moves out of her property on January 1, 2013, and subsequently sells it for $700,000 on January 1, 2014.

The period from 2009 through 2010 is non-qualified use of the property because it was held as investment (rental) property. The year 2013, after Kimberly moved out, is treated as qualified use of the property because of the exception provided in the Housing and Economic Recovery Act of 2008 as discussed above.

Out of the $300,000 capital gain, 40 percent or 2/5ths (two years out of five years owned), or $120,000, is not eligible for the tax free exclusion. The balance of the capital gain, or $180,000, may be excluded tax free under Section 121. The $20,000 gain attributable to the depreciation deductions is recaptured, as required under current law.


folks this is why seeking expert advice is important and not going by the seat of your pants or what you think you know or knew . .

it is not as much the things we don't know that gets us in trouble as much as the things we think we know that ain't so .

i doubt many here knew the laws on the exclusion were amended in 2008 for taking a rental or 2nd home and making it a primary .

this was done because home prices were soaring and folks were owning multiple homes . they were taking 2nd homes or rentals and moving in for 2 years and claiming the exclusion .

so the irs amended section 121 in 2008 to now prorate the exclusion if a rental or 2nd home was made a primary .
like i said , the reverse has not changed . you can live in a house 2 years , rent it out and as long as you sell it in a rolling 5 year window you get the full exclusion . but if you buy the rental or 2nd home first and them make it in to a primary like we were going to do then the amendment apply's .
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Old 01-23-2017, 08:42 AM
 
Location: Loudon, TN
5,780 posts, read 4,830,089 times
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Well I learned something today. It doesn't apply to us in this instance, as the rental has been a rental for 16 years, but it's something good to know for the future.
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