“Hi Gary. We sold our home last year and were able to avoid paying any capital gains taxes. Now weve moved into one of our rental houses and plan to do the same thing this year. Is there any limit to how many times we can do this?
***ANSWER:
Congratulations. Youre taking full advantage of IRS Code Section 121, which allows you to sell your principal residence and avoid paying taxes on up to $500,000 of taxable gain ($250,000 for individuals.)
In answer to your question, theres no limit to how many times you can sell a home. But there are two key things you must know:
#1- Once Every 24 Months
You can only fully use Section 121 once every 24 months. A partial exemption is allowed for (a) change of employment location qualifying for the moving expense tax deduction, (b) health reasons, or (c) unforeseen circumstances.
“Unforeseen circumstances” includes (i) death in immediate family; (ii) divorce or legal separation; (iii) becoming eligible for unemployment compensation; (iv) change in employment leaving the taxpayer unable to pay the mortgage or reasonable basic living expenses; (v) multiple births from the same pregnancy;(vi) damage to home from a natural or man-made disaster, act of war or terrorism; and (vii) condemnation, seizure or other involuntary conversion.
The partial exemption means you dont get the entire 250K or 500K exemption. Instead, you get a % based on the # of months you owned and lived in the home in the past 5 years as compared to the required 24 months. If you owned/lived 18 months, you get 18/24 or 75% of the exemption.
Heres the math
For a couple: $500,000 x 75% = $375,000 exemption.
For an individual: $250,000 x 75% = $187,500 exemption.
BTW, I have some clients in this exact situation. They dont qualify for even a partial exemption. Their own tax person didnt advise them of this.
Fortunately I did, saving them a whopping tax bill.
#2- Recapture of Depreciation
If you move into a rental property and intend to use IRS 121, be aware that you still must pay taxes on recapture of depreciation.
Uncle Sam remembers that big fat depreciation tax break youve been benefiting from, and now wants their money back. And youre taxed on the recaptured depreciation at your ordinary income tax rate, NOT the lower capital gains rate.
DISCLAIMER #1: This is federal tax law. CA state tax laws tend to mimic federal law. But please verify this. If you live in another state, I have no idea about their tax laws.
Disclaimer #2: I just shared with you a small novel that might have sounded like tax advice. It wasnt. As I am not a tax professional, it was merely a friendly discussion. Please verify all this information with your tax professional.
Buying or Selling San Diego Investment Property
