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I have a rental property that was my residence for 1 year and 10 months before it was converted to a rental. I am approaching 5 years since I bought the house.

Am I doomed to pay capital gains if I sell it to use the money for a downpayment on house?

As I understand it, if I have had lived there 2 years to begin and and then within 5 years sold it, I could have avoided capital gains... aigh yigh two months short.

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    What country are you in? And if in a country that has smaller tax jurisdictions within it, which one of those are you in? – Mike Scott Apr 23 '18 at 15:29
  • Have you considered taking out a (2nd) mortgage on this property instead of selling it? – brhans Apr 23 '18 at 17:34
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The IRS rules indicate that you have to live in it 2 of the last 5 years to get the capital gains exclusion, it doesn't have to be 2 consecutive years:

If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn'tt have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.

There are other requirements to qualify for the exclusion, listed in the linked document.

In addition to capital gains tax, you'll have depreciation recapture to pay, that one is unavoidable if selling and not rolling it into another rental.

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