Can You Get a Heloc on a Rental Property
Capital gains tax loophole on rental property?
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Dear Tax Talk,
Can you help me? I am 68 years old. I sold my loft in San Francisco final August. I purchased the loft in 2008, lived in that location for 1 year and because of a separation and subsequent divorce, I had to movement to my previous residence in San Mateo, California. I rented the loft to 3 dissimilar tenants from 2009 until August 2015.
Do you lot see any style that I can avoid paying the tax on my capital gain of about $300,000? A Bankrate article says that a person would have to live in the unit for 2 of the past five years, and I miss that by ii years. What do you recall? Is there a tax loophole or a way to use my divorce to avert capital gains taxation?
— Michael
Alistair Berg/DigitalVision/Getty Images
Dear Michael,
From the facts presented in your question, at that place is no tax loophole available that would utilise to you, and the entire capital proceeds volition take to exist reported.
It appears that y'all are enlightened of the IRS rule that stipulates a taxpayer must ain and occupy a property as a principal residence for 2 of the 5 years immediately before the sale to benefit from the exclusion of the uppercase gain. The exclusion amount is $500,000 for married filing jointly taxpayers, and $250,000 for single taxpayers. Since y'all did not reside in the residence from 2009 onward, yous did not inhabit the holding for any of the 5 years prior to the sale, much less 2 out of the 5. Therefore, the uppercase gain would not be excluded.
The IRS does provide some exceptions if you do not encounter the "2 years of use" general dominion. If the auction results from either a change in the place of employment (your new job must be at least 50 miles from your old task), sure health bug or what the IRS calls "unforeseen circumstances," which includes getting a divorce, so a proportionate exclusion is available. Even so, none of these exceptions applies to you since you didn't inhabit the home at all in the 5 years preceding its sale. Too excluded from the 2-year rule are members of the uniformed services and Foreign Service, employees of intelligence agencies and employees or volunteers of the Peace Corps.
Based on your situation, information technology seems you will have a sizable proceeds on the auction of the dwelling and will potentially need to pay taxes on that sale. I strongly advise yous to consult a tax professional because the precise nature of the gain will need to be figured. The capital gains rates are lower than ordinary income tax rates; notwithstanding, in that location are specific rules pertaining to rental properties requiring "recapture," or including in the gain the depreciation expense that was taken when the home was used as a rental property. Additionally, depending on your income, you lot may be subject to an boosted Medicare surtax of iii.8% on cyberspace investment income.
What is depreciation recapture?
Residential real estate can be "depreciated" over 27 ½ years or xl years, depending on the schedule y'all adopt. Depreciation is an income tax deduction that enables rental holding owners to recover their costs. If you don't claim depreciation, you still have to "recapture" it when you sell the holding. Depreciation recapture involves adding the prior depreciation deduction amounts to the auction price.
Thanks for the great question and all the all-time to you lot.
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Source: https://www.bankrate.com/taxes/can-i-use-tax-loophole-to-avoid-paying-capital-gains-when-i-sell-rental-property/
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