Rental Unit

[Hot dog]

OK so I have this rental and have just kinda figured I'd have it forever and it would help pay for my retirement. It is my old house that did not sell so it became a rental. Have been in the new house like 2 yrs 9 months. The tenants have just asked if we'd be interested in selling. We have been doing fine with the new house although its expensive. We make about 90,000 the rental brings in bout 350 over its mortgage. our mortgage is like 2100. We paid off the 2nd mortgage, had to get cause didnt sell the old house. Now we are debt free except the two mortgages. I thought that if you lived in the house 2 of last 5 years no capital gains. My accountant says no as soon as you turned it into a rental that is not so. If I go move back later and live there two years there would be no tax but not this way. Does that sound right? Anyone know any suggestions what would you do I would make like 125,000 in the sale.

[jIM_Ohio]

What would you do with the 125k sale?

The rental would make 125k in 30 years (357 months).
Good deal if you invest the 125k in something which grows about 5% (just over inflation)
Bad deal if you spend the money.

[Ima saver]

What your accountant says it true, it must be your primary residense for two years, to avoid capital gains.I would invest the money and earn interest.

[Hot dog]

it would make that much in 30 years but I would still have the property. I dont know what I would do but it would be nice to have an ordinary mortgage. I owe like 300,000 @ 6%. We have bout 15 yrs to go and then the whole rental income would b profit minus upkeep of course. It was my primary residence 2 of the last 5 years though. It doesnt count if it was the first two years and then the last 3 1/2 were rented??

[jIM_Ohio]

If you are willing to make landlord a second job you are in a good spot to make more money on it.

Keep doing what you are doing.
refinance and make loan 80 percent LTV
keep the cash or buy another property

every 4-10 years take cash out and keep properties around 80 percent LTV.

[cptacek]

Hot dog, to answer your question, when you started making money off of it by renting, it became a business and not a personal home. The capital gains tax break is for homes, not businesses. When you sell it, if you make money off of it (in this case $125,000) you have to pay capital gains taxes on it, unless it becomes a personal home again by living in it for 2 years.

However, because it is a business, you can deduct from that profit things that it took to find the renter, any upkeep you have done or have to do in the future, mileage to drive over to get the rent check, mileage to drive to the bank to deposit the rent check, advertisements to sell, etc. Anything you are doing to make that business run can be deducted. I'm sure this isn't a big amount, but don't forget about this aspect.

[jIM_Ohio]

One mopre question- have ytou depreciated the house the last 3 years? If not, you have a limited time to file the amended returns for 3 years ago.

[MonkeyMama]

I thought that if you lived in the house 2 of last 5 years no capital gains. My accountant says no as soon as you turned it into a rental that is not so. If I go move back later and live there two years there would be no tax but not this way. Does that sound right?

Um, no, this is not right. The rule is "2 of the last 5 years." It doesn't matter what order the "rental" and "primary residence usage" happens. So you should be able to exclude the gain.

By the same token, the "2 out of 5" rules is OUT come January 1, 2009 (in regards to rentals). It kind of phases in (too complicated to lay out right here) but if you did sell early in 2009 it could make little difference. Depends on how much gain you are looking at, and moreso, how long you have owned the property. But yeah, because of this, the sooner the sale, the better. (& probably a good time to insert an FYI to everyone).

IT can get quite complicated though. Depreciation taken during renting the home would need to be counted as a gain (as mentioned). That is not sheltered from home exclusion. There are other issues at play.

Also, if you use the exclusion on this home, you can't use it again for 2 years. Just FYI.

[Hot dog]

I didnt think that the order of the rental and when you lived in it mattered. So I should be able to sell without paying taxes right? I thought I read something in one of Nolos books about taxes and rentals. I will try to find the book and look it up for my accountant.

[Hot dog]

Does anyone know where I could look online to find it written that I could show my accountant so I don't have to go to the library and find that part of the book. They are redoing my library and I read like three tax books and not sure which one it is in. Should I just find a new accountant that knows the laws? Monkey mama your an accountant right? what do you think?

[jIM_Ohio]

I would look at IRS.gov, search, then tell the CPA the pub number.

[MonkeyMama]

I would just argue with your accountant - they should have the tax resources to look up. If they don't, you need a new accountant.

To be nice, everyone makes mistakes. But yeah, if they are unwilling to look it up, well, that's just crazy.

Off top of my head, home exclusion rules is under section 121. A quick google web search confirms the "2 of 5" rule - I double checked because reading the thread I wondered if I Was crazy or something.