I have a rental house I want to sell, and it is the only house I own. Will I have to pay capital gains tax on it when I sell it? If I do have to pay, can I offset the tax by putting the profits in my investment account? Should I live there for six months and then sell?
Answer: Any gain realized on the sale of an investment asset, including real estate, will constitute a taxable event. The gain realized on the sale of a property that has served as the owner’s principal residence for at least two years (24 months) may be eligible from some exclusion/exemption on part or all of the gain, depending on the extent of the gain and whether there was non-principal residence usage of the property (such as a rental). From the facts presented, it does not appear that any part of this property will provide a principal residence tax gain exclusion. Accordingly, if there is a gain realized on the sale of this rental property, it will be a taxable gain. There is no provision, in your example, in which you can defer the gain by doing anything else with the profits. You have a taxable event.
There is a tax provision called Code Section 1031 that would allow deferral/nonrecognition of gain if the property were exchanged, without any receipt of funds, for another qualifying property. It requires the use of a qualified third-party intermediary to handle the transaction. If a “qualified swap” is done, there is only recognizable gain to the extent that you receive financial liquid remuneration (such as cash or cash equivalent). A Code Section 1031 will require professional tax expertise.
Answered by: James J. Newhard, CPA, is a sole practitioner in Paoli, Pa.