Will I pay capital gains on the sale of rental property that was originally my primary residence for two years?

by Amy M. Swartzfager, CPA | Apr 30, 2018

Will I pay any capital gains on the sale of my rental property, which was originally my primary residence? I bought the property in August 2013 for $156,000, and lived in it until June 2016. From July 2017 until now (May 2018), the house has been rented out. Therefore, if I sell the house for $210,000 sometime this year (say, August 2018), am I exempt from any capital gains since I owned it for five years and lived it for more than two of those years?

Since you resided at the residence for two out of the last five years, then you would qualify for an exclusion of $250,000 against the gain on the sale of the residence if your filing status is single, and a $500,000 exclusion against the gain if married filing jointly. However, if any depreciation was taken on the building while it was a rental, the amount will be recaptured as ordinary income on your return. This is calculated separately from the capital gain. Therefore, based on the information provided, there would be no taxable income as a result of the sale of the residence unless depreciation was taken on the rental. You would not qualify for this exclusion if you excluded the gain on the sale of another home during the two-year period prior to the sale of the above-mentioned residence.

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Answered by: Amy M. Swartzfager, CPA, is a senior tax analyst with API Technologies Corporation in Fairview, Pa. 

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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