Capital Gain Taxes
My wife and I are purchasing a new home and wish to turn our current home of 12 years into a rental property, which by the way has doubled in value from the original purchase price. We only wanted to hold it as an investment property for the next three years hoping avoid captial gains taxes via the 2 of the last 5 year tax rule. However,I was told we would have to pay captial gain taxes on a protion due to the rental conversion. If this is true......on what portion would we pay captial gains taxes? The original purchase price, the fmv at the time of conversion >>>>>>>Please help! Thank You kindly! 
In your case, use your primary residence as a rental for less than three years prior to the sale, then your capital gains exclusion on the sale of your primary residence remains intact.
However, because you will have used your primary residence as a rental property, you will be allowed a depreciation expense during your period of rental use. When you sell the property, the amount of depreciation allowed will be recaptured at a 25% tax rate. Depreciation recapture is outside and separate from the capital gains exclusion.[ Edited by DaveT on Date 02/25/2004 ]
As I understand it you would not have to pay any capital gains tax since you would meet the exemption criteria (2 out of 5).
The only issue is if your gain is over 500K. You get a 250K exemption and your wife gets another 250K for a total of 500K for a married couple.
So if you owned the house free and clear and sold it for 600K you could only exempt 500K from taxes. The remaining 100K would be taxable. This is oversimplified because you can actually deduct cost of selling the house from your "gain"
I don't know at what rate, etc. you would be taxed for going over the 500K
I'm not a tax expert but I've never heard of being taxed due to a rental conversion.
Go to the irs website and look up publication 523 and 544 they'll fill you in more completely or ask a tax attorney
Best of luck
Roger
Quote:I don't know at what rate, etc. you would be taxed for going over the 500K
I'm not a tax expert but I've never heard of being taxed due to a rental conversion.Sale profits that exceed the capital gains exclusion (whether $250K or $500K) are taxed at the taxpayer's applicable long term capital gains tax rate.
IRS Publication 523 does tell you what to do when your primary residence was used for either rental or business purposes. The tax due on the depreciation allowed (or allowable) is calculated on Form 4797.
DaveT/Steeler19.......I thank you both for sharing your knowledge and the fast response time. I did visit my local IRS office and...."yes" publication 523 cleared it all up. Thank You Much!