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      09-11-2019, 01:43 PM   #26
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Originally Posted by jwzimm View Post
Another topic some folks don't consider is Capital Gains tax. You are allowed an exemption of $250k (or $500k if married) which you can shield from the Cap Gains tax when you sell your primary residence. The key here is how that is defined. The IRS defines your primary residence as a home you have lived in for 2 of the last 5 years (non-consecutively). What that boils down to is you are able to rent out your house for up to 3 years and still be able to shield the proceeds from a sale from the Capital Gains tax. If you do not sell it prior to 3 years after moving out of the property (to the day) you will be liable to pay Capital Gain tax on 100% of the proceeds.

One exception to this rule is the like-kind exchange whereby you can shield those proceeds provided you reinvest them immediately into a like-kind investment. The catch is, you would be required to invest them into another rental property. You cannot use them for the purchase of a private residence.

Another factor is depreciation of the rental property. When you do your taxes the rental income is counted as taxable income. You can usually offset a good portion of this income by claiming the depreciation of the home (a total non-sequitor as homes usually increase in value but that is the IRS for you).
This is mostly true. The LTCG exemption is actually quite a bit higher than those numbers, since you can also subtract your full cost basis in the property from the sales price. Your cost basis is calculated by starting with the price you paid for the home, and then adding purchase expenses (e.g., closing costs, title insurance, and any settlement fees).

To this figure, you can add the cost of any additions and improvements you made that had a useful life of over one year. Finally, add your selling costs, like real estate agent commissions and attorney fees, as well as any transfer taxes you incurred.

Quote:
Originally Posted by jwzimm View Post
The big "gotcha" is that you will be liable to pay the taxes on all of the depreciation that was able to be claimed against an investment property when you sell it. That is true even if you did not claim the depreciation in previous years taxes. That means there is zero sense in not claiming the depreciation of the asset.
This is not true. You will not have to pay an taxes on depreciation you did not elect in prior years. I'm not sure where you got this information. Here are the particulars if interested. I am a certified public accountant. While I agree that depreciation recapture is going to be assessed by the taxing authority at time of sale, the IRS provides a lookback clause in that you can amend previous returns to offset the recapture provisions in order to not have to pay taxes you don't owe. So basically, you pay the taxes and then get them refunded via amended returns. Not a smart move, but you won't be taxed on un-taken depreciation.

https://www.irs.gov/pub/irs-pdf/p527.pdf

https://www.irs.gov/pub/irs-pdf/p946.pdf
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Last edited by Run Silent; 09-11-2019 at 01:48 PM..
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