Sell or Rent?
I have only owned this property in VA for a year and I want to move. I believe that if I sell it before two years I will have to pay taxes on my profit. Is there a way around paying this tax? I'm thinking of contacting a property management company to check into my renting options but I'm not very confident in this option. Any suggestions?
Ally,
There are a couple things that you need to consider first.
1. Do you ever want to invest in rental properties?
2. Can you afford to purchase another house without selling your own house?
If you answer is Yes to both questions than I would ask you to examine whenther or not you can make a positive income on Renting your house out. If so I would suggest renting it out. If not then it is really of no use to you.
To see if renting would be benificial take the mortgate payments of your house now + what other expensise you have to pay(i.e. insurance ex.) and subtract it from what you can get in rent each month.
Dan
I am interested in investing in rental properties in the future but not in this area. I was only thinking of renting it to try to avoid having to pay taxes on my capital gain if I sell. If I was going to rent out the house I would have to rent out the land (property is on 14.313 acres) also to supplement the income and I won't really be making a profit. Is there a way around paying the taxes? Have you heard of a company called Starker Services,Inc.?
Ally,
Selling your primary residence is a taxable event even if you turn it into a rental for a couple of years first. It is still a taxable event when you sell it.
Since you have only owned the property for one year, will you have any profit when you sell? I wonder how much appreciation you really have in the property after only one year.
For example, if you paid $300K for the property one year ago, and you can sell it for $325K now, but selling expenses (sales commission, closing costs, etc) are $22K, your net taxable profit here is only $3K. Your capital gains taxes on $3K would be (at most) $600. Hardly worth the time and effort if the expense of implementing a complicated tax avoidance strategy is more than your tax liability.
The tax code does exclude up to $250K in profits (per taxpayer) on the sale of your primary residence from capital gains taxes if (1) you have owned the property at least two years of the five years prior to sale, AND, (2) you have occupied the property as your primary residence at least two years of the five years prior to sale.
Converting your primary residence to a rental property after only one year of occupancy will not help you avoid capital gains taxes when you sell. In a way, this is good news for you since you say you really do not want to become a landlord.
The tax code does have some exceptions to the two-year rule, related to health and job relocation. To see if one of these exceptions may apply to your situation, consult a professional tax preparer in your area.
You asked about the Starker Services Inc. I have not heard of this company, but from the name, I assume that you are thinking about deferring your capital gains taxes with a tax-deferred exchange (sometimes called a Starker exchange). The bad news here is that your primary residence is not eligible for a tax-deferred exchange. This strategy is reserved for investment property or business property.
The simplest way to avoid paying capital gains taxes on the sale of your property is to just continue to occupy your property as your primary residence for another year (since you already have one year under your belt). After two years of occupacy AND ownership, you can sell your primary residence and take advantage of the capital gains exclusion.
Does this help?[ Edited by DaveT on Date 11/23/2002 ]
Thanks Dave, that was very informative and helpful. I'm glad renting isn't an option. What is your opinion of the Starker exchange? So, if I was actually relocating a home based business there would be more options open to me?