Discussion:Converting Home to rental Real Estate

Let's say you have owned your home for more then 5 years. You decide not to sell and you buy another home. You decide to convert your old home into a rental property. When you sell the rental property do you have to pay capital gains on the total sell of the rental? Or is their another way to report the gain as part personal part rental?

2. It depends. It involves length of rental vs length of personal use, as well as other criteria. You will have to recapture depreciation, but you may be able to avoid capital gains. You should do some tax planning with a tax professional if you go down this road.

1)If you convert to a rental and sell the property within 3 years from the date you vacated you will be eligible for the personal residence exclusion of $250,000 single or $500,000 married. The sale date is the date indicated on the HUD statement not the contract date. You would however have to pay tax of 25% capital gains tax on the depreciation you have taken over the period which shouldn't be to much .

2) If you convert to a rental and sell the property after 3 years from the date you vacated you will not be eligible for the personal residence exclusion.This is not a good scenario because your total gain, measured from the original date of purchase, would be subject to capital gains tax of up to 15 %. That portion of the gain attributable to depreciation would be subject to 25 % tax. However if you move back into the home and convert to your personal residence no tax is due. You may later satisfy the 2 out of 5 year requiremnt to exclude gain .