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Is there a way for a partial exclusion in this situation:

I left the US in 2016 to work from Istanbul, and still no end in sight as to how long I will be here. I have to sell the property (the only property I own in the US) which was always on rental since 2005 (while I myself was on rentals too). So this place was never a primary residence but on the other hand, it was not an investment property either because I did not own another home.

There are other blurry lines in my mind. And I'm not sure if I have any rights to lower the humongous capital gain tax that is waiting for me in case of a sale. The amount is deterrent I cannot make a move.

My plan is to sell it and use the proceeds in buying a home in Istanbul to use it as my primary residence. But there is no exchange between California and Istanbul/Turkey neither.

We bought it in 2005 at 300K. Now it is worth 900K. Capital gain is 600K. I have 450K equity in it. After the sale, I may end up 200K capital gain tax, if not more. And this is not purchased for investment purposes either. It was a controlled price unit that came with a 15-year no-sale restriction by the LA county. We qualified for it. And now the 15 year period is up.

I'm looking for ways to lower this tax due to my special circumstances but cannot figure it out.

Thanks for your help.

  • I'm curious why you think this shouldn't qualify as an investment property? What else would you consider it as? You've never lived in it and don't even live in the area. It seems the only reason you bought it was to make money off of it. That's the definition of an investment. – Kat Jun 15 at 4:56
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Regarding being overseas and not being able to count it as your principal residence. I know there are special rules for active duty military who are stationed overseas. I think there might be a program for some other US government employees stationed overseas such as the US State Department. Other than that I don't believe that your choice of deciding to work overseas gets you a special tax break.

Other than that I see several other issues with the information in your question.

which was always on rental since 2005 (while I myself was on rentals too). So this place was never a primary residence but on the other hand, it was not an investment property either because I did not own another home.

  • You were renting it out so it was an investment property.
  • You never even mention anywhere in the question depreciation. You have been depreciating the property, and have been filing your income taxes correctly?

We bought it in 2005 at 300K. Now it is worth 900K. Capital gain is 600K. I have 450K equity in it. After the sale, I may end up 200K capital gain tax, if not more.

  • You recognize that you owe 450K on the mortgage. It is good that you realize that the profits will be based on the 900K-300K and not the amount over the loan balance. Of course the depreciation and the recapture makes this calculation more complex

And this is not purchased for investment purposes either. It was a controlled price unit that came with a 15-year no-sale restriction by the LA county. We qualified for it. And now the 15 year period is up.

  • This is confusing. It sounds like either a program where you had to live in and own the property for 15 years, or one that had a rent control period. Some jurisdictions allow low income families to purchase a house based on their income and help from the government. They have to stay in the property for X years and can't sell it for Y years. I assume your renting the property and never living it followed all the rules.

I don't see a way to reduce your taxes as long as you are living out of the country and can't make it your primary residence.

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Well, the long-term personal capital gains tax rate is only 20% but is expected in the future to be returned by legislation to the income tax rate. The real estate would likely be sold, or transferred to an LLC, before higher capital gains taxes are put in place. Then the LLC would have the option of being taxed as a corporation with corporate tax rates not expected to go over 25%.

But a transfer to an LLC steps the real estate basis up to the current market value and requires capital gain tax paid by the homeowner.

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