[quote=ltsdd][quote=La Jolla Renter]
20 years from now, convert to primary residence for 2 years and sell for $500k tax free gain.
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This loophole has been closed with the Housing Assistance Tax Act of 2008. Essentially, value appreciation while the property is a rental is subjected to capital gains tax.[/quote]
Funny you should mention this because I as just talking about this with others and was deciding whether to discuss it here, since most of the posts now on Piggington aren’t finance or re related, so I thought it would be a moot point to discuss and brainstorm… But now that you brought it up. Based on my initial research, converting a rental back to a primary and then subsequently selling the primary will result in the following tax consequences.
1) you end up paying of depreciation recapture on your first rental and any portion of your new home that was briefly a rental
2) your taxable capital gains ends up being prorated based on number of years both properties were rental / number of years your exchanged home is a primary, subject to a 5 year requirement which I won’t discuss here. The longer you use the property as a primary, the less the taxable amount on the cap gains.
So for example if you had a rental for 4 years and 1031 exchanged to a home was rental for 2 years and then converted it to a primary home and used it as a primary for 10years. When you sell it, if you had a $250k capital gains from it, 6/16th of that would be taxable at your capital gains tax rate. 10/16th of it would be tax free…I think… again i just started researching this now.
And, there would be no tax consequences if you don’t sell you new primary.
I think there are also a lot of benefits regarding step-up cost basis when you die and your kids inherit the property, but I haven’t finished that research yet ( I believe both capital gains a depreciation recapture both get wiped out as part of your kids inheriting your estate, but not 100% certain, as I haven’t gone researching there yet)
