Selling a home - renting - and taxes

[RiverRat1]

Trying to read up and figure out a few things.

I have a home that's my primary residence - Say cost basis is 100k. I can sell it and pay no capital gains taxes as long as the profit is less than 500k (since I'm married).

But if I move to another house and make that my primary residence and rent this house then when I sell I will have to pay capital gain taxes if I'm gone more than 3 years (I believe).

Question is does the cost basis stay at 100k? Or does it change to what ever the value is when we decide to turn it into a rental and no longer our primary residence?

[Aggie PhD]

Cost basis of what you paid for it from
My understanding

[Huntindad]

Kinda in the same boat... thinking about selling my house next spring if prices are still stupid high. Renting somewhere in Burnet or Lampasis till we build our retirement home.

[RiverRat1]

Cost basis of what you paid for it from
My understanding

This is what I'm afraid of. Basically forces one to sell within 3 years otherwise owe a crap ton of tax.

Guess I could sell it and buy the house next door and then my cost basis would be much higher Stupid rules.

[whitetailtrail]

There is a 1031 exchange option if rolling it into another property upon selling. Or if you can get your AGI below 80K for one year, or their is a year on the horizon where this will happen anyway, you can sell in that tax year and pay 0% long term cap gains tax

[44mAG]

Kinda in the same boat... thinking about selling my house next spring if prices are still stupid high. Renting somewhere in Burnet or Lampasis till we build our retirement home.

Yep we are selling next spring as well. All signs are pointing to housing prices still being stupid high if not higher 9-10 months from now. Late 2022 is still a little unknown. I thought about the renting game, but it would take a lot of months rent to make the non taxable income we can make with a straight sell.

[TexasBob]

Sell it, miss the tax. Pay toward new residence and finance a rental prop if you want in that game. Expenses to offset rental income and someone else is paying for your asset. just my 0.02

[BrianL]

Trying to read up and figure out a few things.

I have a home that's my primary residence - Say cost basis is 100k. I can sell it and pay no capital gains taxes as long as the profit is less than 500k (since I'm married).

But if I move to another house and make that my primary residence and rent this house then when I sell I will have to pay capital gain taxes if I'm gone more than 3 years (I believe).

Question is does the cost basis stay at 100k? Or does it change to what ever the value is when we decide to turn it into a rental and no longer our primary residence?

That is an tax accountant question, but I think it applies ONLY to your primary residence. If you convert to a rental, it isn't your primary residence. Regular capital gains on investment property at that point would be my guess.

Sell take the gain and invest in a bigger place.

[hoythunter]

How about form an LLC and sell it to the LLC? Then your cost basis is the day your LLC buys it and your liability is limited on the rental as well. Costs a bit to set up and do the paperwork, but may be better in the long run? Most landlords with multiple rentals set up several LLC's and have a few properties in each from my understanding. May be a good idea for long term planning if you decide to add more rentals in the future as well. Just a thought...

[Hunteraudit]

This is the way the home sale exclusion is intended to work. It is intended to protect homeowners investments in their PRIMARY residences. It is not intended to protect your capital investment in a rental business venture or a secondary home.

Your basis will be more complicated but essentially it will be cost + capital improvements with a depreciation calculation.

[RiverRat1]

This is the way the home sale exclusion is intended to work. It is intended to protect homeowners investments in their PRIMARY residences. It is not intended to protect your capital investment in a rental business venture or a secondary home.

Your basis will be more complicated but essentially it will be cost + capital improvements with a depreciation calculation.

I totally understand. But in my case I'm hanging primary residence so IMO it would make sense the new rental basis should be market value when it switches...not back dated 27 years ago when I bought it.

I mean I could sell and then rebuy, or create an LLC as said above, or rent 3 years and live in it two years etc... Doesn't make sense to me.

It would make sense if I bought a home or property in order to rent out.

[Hunteraudit]

But, you ARE buying/renting another house in order to rent out your current house. Again, the exclusion is not intended for your rental house, that’s what it boils down to.

If you sell it and rebuy it for a rental property, your cost basis would be the obvious and any future gain on sale would not enjoy the home sale exclusion unless you made it your primary residence again. Even then, there are other tax complications. Don’t forget the costs associated with doing this.

Are you going to sell it to the LLC at fair market value? Will it be an arms length transaction or will the IRS view your LLC as a disregarded entity? If so, will they allow you to realize the gain in your personal income taxes or will it pass to the LLC where the exclusion won’t be granted? It’s been too long since I took those classes in college so I honestly don’t recall, but I definitely know they’re questions worth asking.

Not trying to be argumentative, just trying to help you think it through. I do find this stuff interesting for some reason.