New tax law-turning rental into primary residence

[birmingplumb]

This changes things and merits its own separate post.
Many landlords use this as their “out” plan. ( 1 at least – me)
“Move back in rental for 2 years and get 500k exclusion of capital gains on sale if married 250k if single” was rule when I got into this and my plan. See interpretation of new 2009 rule below.

http://www.1031.us/PDF/ConvertingInvestmenttoPrimary3-2010.pdf

[Coronita]

http://www.nolo.com/legal-encyclopedia/avoid-capital-gains-tax-selling-home-29901.html

[birmingplumb]

from your link: you can’t go back until 1985 when you lived there from 1985 till you rented it in 2000-2012 but in my link that period is used in equation which is right? I need 3rd interpretation
Reduced Exclusion for Second Home Also Used as Primary Home

As of January 2009, new tax rules require that, if you sell a home that you sometimes used as a vacation or rental property and sometimes as your primary residence, you’re eligible for only that portion of the capital gains exclusion that corresponds to the amount of time you actually lived there as your primary residence. (The rest of the time is called “non-qualifying use.”) Note that the calculation is made over more than a mere five-year period — it applies right back to January of 2009. What’s more, if, during the five years before the sale, you never actually made the home your primary residence, you’re likely disqualified from using the exclusion. (You won’t be surprised to hear that this new rule was meant to generate additional tax revenue, to offset some other tax cuts.)

from my link:The amendment states “gain shall be allocated to periods of non-qualified use based on the ratio which (i) the aggregate periods of non-qualified use during the period such property was owned by the taxpayer, bears to (ii) the period such property was owned by the taxpayer.”
How does this affect your second home planning? Suppose the married taxpayer exchanged into an investment property and rented it for four years, then moved into it and lived in it for two years. The taxpayer then sold the residence and realized
$300,000 of gain. Under prior law, the taxpayer would be eligible for the full exclusion and would pay no tax.
Under the new law, the exclusion will have to be prorated as follows: four-sixths (4 out of 6 years) of the gain, or $200,000, would be taxable and thus would be ineligible for the exclusion. Two-sixths (2 out of 6 years) of the gain, or only $100,000, would be eligible for the exclusion.
Importantly, non-qualified use prior to January 1, 2009, is not taken into account in the allocation for the non-qualified use period but is taken account for the ownership period. Thus, suppose the taxpayer had exchanged into the property in 2007, and rented it for three years until 2010,and then converted the property into a primary residence. If the taxpayer sold the residence in 2013, after three years of primary residential use, only one year of rental, 2009, would be considered in the allocation for the non-qualified use. Thus, only one-sixth (1 out of 6 years) of the gain would be ineligible for the exclusion.
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Realty Exchange Corporation
Your Nationwide Qualified Intermediary for Tax-Deferred Exchange of Real Estate Since 1990
800-795-0769 ● http://www.1031.us
In general, the allocation rules only apply to time periods prior to the conversion into a principal residence and not to all time periods after the conversion out of personal residence use. Thus, if a taxpayer converts a primary residence to a rental and never moves back in but otherwise meets the two-out-of-five year test under Section 121, the taxpayer is eligible for the full exclusion when the rental is sold. This rule only applies to non-qualified use periods within the five-year look-back period of Section 121(a) after the last date the property is used as a principal residence.
This great tax strategy is still available, but Congress has created new rules, so it is important taxpayers get good advice before making any moves.
Bill Horan, a Certified Exchange Specialist®, is President of Realty Exchange Corporation,

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