Capital Gains Exclusions

It is my understanding, if I rent my primary residence after residing in it for 3 years, then I can rent for another two years and then sell to benefit from capital gains exclusion.



However, if I then move into a rental property I have owned for one year - how long do I have to reside in it or own it before I can once again claim capital gains exclusion?



F.Y.I. I also have another townhome that I will 1031 exchange into another property at some time over the next 4 years.

Comments(12)

  • NewKidInTown34th October, 2006

    It is my understanding, if I rent my primary residence after residing in it for 3 years, then I can rent for another two years and then sell to benefit from capital gains exclusion.

    Your understanding may be a bit imperfect. The two of five year clock looks backward from the date of sale. If you have owned and lived in your primary residence for 3 years, then vacate the property when you put it in service as a rental, you have another 3 years to sell the property and still qualify for the capital gains exclusion.

    Beginning from the date of sale, and counting backward, you will have owned the property five years, you will have occupied the property as your primary residence for two of the five years prior to the sale, So, you qualify for the capital gains exclusion.

    Keep the property as a rental for three years and one day before selling, and your property becomes an investment property. Because you have will failed to meet the two of the prior five years occupancy requirement, you no longer qualify for the capital gains exclusion on the sale of your primary residence.

    However, if I then move into a rental property I have owned for one year - how long do I have to reside in it or own it before I can once again claim capital gains exclusion?

    There are three basic rules to qualify for the capital gains exclusion on the sale of your primary residence. Each has to be met. Fail to meet any one and you fail to qualify for the capital gains exclusion.You must have owned the property two of the five years prior to the sale, and, You must have occupied the property as your primary residence for two of the five years prior to the sale, and, You can not have used the capital gains exclusion within the 24 months prior to the sale of your primary residence.
    In your scenario, you would have to occupy your rental property as your primary residence at least two years before you sell to once again claim the capital gains exclusion.

    F.Y.I. I also have another townhome that I will 1031 exchange into another property at some time over the next 4 years.

    Does not affect the tax treatment of your primary residence sale.[ Edited by NewKidInTown3 on Date 10/04/2006 ]

  • mikejaquish30th March, 2006

    If you make your living off distressed homeowners, it will be negative for you.
    Otherwise, it will be positive.
    I support it also.
    Got the bumpersticker.
    [addsig]

  • mikejaquish31st March, 2006

    If you can parse any difference between the Democrats and Republicans, yuo are looking at them wrong.

    They are the one and the same thing. The cores of both parties are corrupted by one, and only one, motivation: To stay in power.
    Neither party gives a damn about the USA, morality, prosperity, peace, war, or any other issue, unless that issue threatens their place at the public trough.

    They have done a heck of a job distracting voters and making them the equivalent of pro football fans.
    Pro football fans can root for the home team, vilify the other team, celebrate, riot in the streets, bet and lose money, wear the colors, but when all is said and done, it is just an NFL game, regardless whose team wins.

    Same thing in Washington DC, When all is said and done, the lust for power eclipses any righteousness, but we quibble about the color of the uniforms of the players.
    Neither party will ever offer any form of meaningful tax reform. Major change is against their interest, since F.U.D. among uneducated voters is easy for the opponent to exploit.

    Cynical enough?
    [addsig]

  • mcole31st March, 2006

    I think a consumption tax would be a great way to go. And on the positive side for investors, capital gains tax would go away also.

    One caveat though is the 16th Amendment. If that doesn’t change, the government could turn right around and reinstate an income tax after a national sales tax is in place.

    (I guess I’m a cynic too.)

  • bgrossnickle31st March, 2006

    Quote: They have done a heck of a job distracting voters and making them the equivalent of pro football fans.
    Pro football fans can root for the home team, vilify the other team, celebrate, riot in the streets, bet and lose money, wear the colors, but when all is said and done, it is just an NFL game, regardless whose team wins.


    Mike - amazing that you say this. This is the exact analogy I use when Democrats say everything Replublican is bad and Republicans say everything Democrat is bad. My god, nobody knows any of the issues nor how any of our elected officials have voted, yet I like this guy because he is a Dolphin and I hate that guy because he is a Steeler. Our elected officials have turned us into drunken cheese heads. It infuriates me how most everyone accepts that racial and religious stereotypes are just stereotypes, yet we allow intelligent statesmen and journalist to get away with labeling everybody either Democrat or Republican as though everyone in those two party are exactly alike and the two parties are exactly opposite. It is just plain ignorant.

  • mikejaquish31st March, 2006

    Magnets,
    Take that ball an run with it!
    LOL

    Brenda,
    I thought I made that one up...
    WAIT!!!!! You hate the Stillers? See you in the parking lot. Bring medical backup.
    [addsig]

  • mikejaquish2nd April, 2006

    I just read this thread.....
    Wow! I rest my case.



    http://www.thecreativeinvestor.com/residential/ViewTopic53757-23.html
    [addsig]

  • mikejaquish2nd April, 2006

    "By the way, what happens to the Social Security benefit that I will be entitled to in a few years if the Fair Tax Act eliminates the payroll taxes that support the system? "
    The Fair Tax incorporates Social Security in its rate structure.
    Confirmation is in the following links:
    http://thomas.loc.gov/

    Some other Fair Tax links:
    http://linder.house.gov/index.cfm?Fuseaction=Resources.Home&Resource_id=1
    http://linder.house.gov/_pdfs/FairTaxFrequentlyAskedQuestions.pdf
    http://www.fairtax.org/
    http://usgovinfo.about.com/cs/taxes/a/aafairtax.htm
    http://www.fairtaxvolunteer.org/smart/sketch.html
    [addsig]

  • mikejaquish3rd April, 2006

    Jason,
    I believe that with adequate planning free market forces will work, and that the drop in prices would be almost immediate. Look how fast gas prices move, both up and down. It can be done.

    _________________
    Mike J
    Elevate Your Game![ Edited by mikejaquish on Date 04/06/2006 ]

  • wexeter23rd August, 2006

    Sorry, you do not qualify for 1031 exchange treatment. You have already sold the property and the contract for deed is merely the financing vehicle. The balloon payment is a principal payment, which does not qualify for 1031 exchange treatment.
    [addsig]

  • Knine28th September, 2006

    We have an investment property with about 50k in equity if we refinance @ 75%.
    We were considering a 1031 exchange of the property.
    It is possible to refinance, draw some of the equity out and then 1031 excnage it. We have owned the property for 18 years. if that matters.
    thanks for any replies

    Karin

  • wexeter9th October, 2006

    Yes, you can refinance and pull cash out, but you do not want to refinance immediately prior to your 1031 exchange. I would recommend refinancing and then waiting at least 6 months before you list, sell and then 1031 exchange into a like-kind replacement property. It is all about your intent. Refinancing too close to your 1031 exchange could support an argument that you did not intend to reinvest, but actually intended to cash out.
    [addsig]

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