The Converted Home

A person purchases his/her first home, raises a family, but for some circumstances (e.g., better job, death of loved one, or even just to upgrade), decides to move out, but instead of selling the home, decides to keep it (maybe hoping for a better realty market) and rents it out, and then (presumably when the lease runs out, or even the tenant moves out).  The questions becomes what are the tax consequences when a person coverts his/her former home into a rental, and then sells it.          

First of all of course a person who sells his/her primary residence, he/she can exclude the gain on the sale (which, as written before, the selling price minus the purchasing costs; including major improvements), up $250,000 ($500,000 for a joint couple), so long the primary residence in question has been owned and used for 2 out of the last 5 previous years.  The problem comes is what happens to the “converted property” that was a person’s residence (filling the 2 out of the 5 year rule) than became a rental, because there could be a partial exclusion.      

In the past (at least since 1997), when the exclusion rule was enacted by Congress, a person did not have to concern on a “converted property” from a primary residence to a rental, and able to claim the full $250,000 /$500,000 gain exclusion (except maybe for the depreciation claimed as “recapture’).  However, Congress in 2008 (as part of the Housing Act of 2008, which provided mortgage debt relief to the “mortgage crisis” that occurred back in 2008-9), has put a time of looking back for “non-qualified use” of a primary residence.  Which means a person has to look back (starting on January 1, 2009) to determine the amount of time the property in question was used as a rental vis-à-vis, it used as a primary residence.  For example, David purchased Homeacre on January 1, 2010, as his primary residence.  He then moved out of Homearce, and started to rent it out on January 1, 2012.  He did not sell Homearce until January 1, 2015.  Thusly, the period of “non-qualified use” is 3 years (from January 1, 2012 to January 1, 2015) out of the 5 years that he owned Homeracre.  So, he could partially exclude only 2/5 (or 40%) of his gain from income taxation, for the two years (January 1, 2010 to January 1, 2012) that he owned and used Homearce has his primary residence, and the remaining 3/5 (or 60%) of the would be taxable gain.

So, if you did owned a home, and then later converted to a rental, and plan to (or already did) sell it, please let us know at info@kayatax.com, and we would be more than happy to go over this period of “non-qualified use” and assist you in determining of how much of a partial gain who can exclude from your income tax return