Major life milestones often have a major tax impact. Changes in your marital status, having a baby or adopting a child can have significant impact on your taxes. This is the place to ask questions about dependents, real estate, and other various scenarios that play a significant role in what taxes you pay.
07-12-2017 10:35 AM
We're in the military and have moved away from our houses at previous assignments. However, both houses are now rentals. We're thinking about selling both houses however, I wanted to know about the tax implications of both.
I've owned one house since NOV 2009, live in it until DEC 2013, and it's been a rental since 2013 as well. House valued at $151,000... we paid $172,000. (NC)
The other house; we've owned since SEP 2014, live in it until APR 2016, it's been a rental since APR 2016. House valued at $278,000... we paid $255,000. (WA)
Thanks for the help.
07-12-2017 12:26 PM
Welcome to the H&R Block community.
Let's start with the first house (the one you bought in 2009). You won't be eligible to exclude any gain from income on that house because you have only lived in it for one year out of the last five (the rule is 2 years). So for the 2009 house all gain will be taxable under the capital gains rules. Based on your purchase price VS the current value you probably will not have a huge gain, but ultimately that is determined by the selling price. If your gain does end up being around the $20,000 difference in the values you provided then you would be looking at $3,000 to $4,000 worth of capital gains tax depending on your capital gains rate. Most taxpayers' capital gains rate is 15% but if your taxable income puts you within the top couple of tax brackets (33% through 39.6%) then your capital gains rate is 20%.
For the second house that you've owned since 2014 you are also short of the two-year requirement for the amount of time the home was your primary residence so all gain will be taxable. Again though, I do not believe you will have a huge gain and your tax liability will not be affected a terrible amount. If you were to live in this home again for another six months at some point during the next three and half years then you'll meet the two-year requirement and you'll be able to exclude the first $500,000 worth of gain less all allowable depreciation for the rental period (assuming you file a joint return).
Keep in mind that your taxable gain is determined by: SELLING PRICE - SELLING EXPENSES = REALIZED AMOUNT - ADJUSTED BASIS = TAXABLE GAIN. So you'll get to deduct things like commissions from your sale price and then you also get to deduct your adjusted basis before arriving at your taxable gain amount (adjusted basis is equal to your purchase price plus the cost of improvements less deductions & credits taken for energy efficient improvements, casualty losses, and depreciation. Therefore, you may not have much of a gain if any by the time you deduct everything and the lower your gain actually is the less your taxable gain will be.
If you do end up with a larger gain that would push you into a higher tax bracket then another option is to sell through an installment sale so that you receive a portion of the income from the sale each year for however many years. This will not necessarily lessen your tax, but it will relieve some of the tax burden for you each year.
If you have any other questions I'll be glad to help.
Senior Tax Advisor (Tampa, FL)