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Moving Into Rental |
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. My husband and I are nearing retirement. In 1974 we purchased a 2-family home, renting one floor and living in the other. When our family grew, in 1994 we bought the single family “fixer-up” home right next door, and continue to rent both units of our original home (a main unit and a tiny unit we rent to my brother for next-to-nothing). We are considering selling the rental home (too much upkeep and we could sure use the cash). I know to avoid capital gains, we would need to move into our rental property and use it as our primary residence for at least 2 of 5 years prior to selling. Would it be possible to work out an arrangement with the current renters to “exchange” homes for two years, keeping the rent the same. The space in our current home and the rental home is comparable.
Is this legal and ethical? If so, what problems should we anticipate? Any suggestions would be greatly appreciated.
Thanks so much! (P.S. A few statistics…We have been depreciating the rental, but our mortgage on the rental is down to $68,000..we had refinanced in 1994 when we purchased our current home. Our current home is paid off, and if it’s possible to do what is proposed, we’d then sell our rental at the end of two years and move back to our current home). Hope this wasn’t too confusing!
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If you actually move into half of the rental and convert it to your own residence for two years (mailing address, voting address, utility bills etc) then yes, you can use the homesellers exclusion on half of the gain when you sell that building, though you'd still need to pay tax on any part of that gain attributable to recaptured depreciation if you claimed any after the new tax law went in in 1997. You'd owe capital gains tax on the other half of your profit, the portion attributable to the floor that's rented out, and again, any portion of your gain due to recaptured depreciation is taxed at a higher rate.
In other words, the IRS regards the sale of duplex in which you live as two different transactions. On the part that's your own home, the homesellers exclusion applies. The other half is taxed as rental property.
Yes, it's complicated, and you should get explanations from your own tax professional. |
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Edith
Originally published on November 28, 2007 |
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