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rental

Q&A: When landlords move in to an old rental, are tax breaks part of the deal?

July 29, 2024 By Liz Weston

Dear Liz: My husband and I bought a single-family home as a rental property in 1988. We paid $135,000. The tenants moved out in February and we are doing major upgrades now. If we moved into the property and sold it after two years, would the first $500,000 of gain be excluded from income tax? The property is under our family trust and our two daughters are successor co-trustees.

Answer: Generally speaking, a former rental property can qualify for the home sale exclusion as long as the owners claim it as their primary residence for at least two of the five years before the sale.

The home could still be subject to depreciation recapture, however, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. You probably deducted depreciation on the rental over the years — basically reflecting the wear and tear on the property. The IRS typically requires that tax break to be paid back when the property is sold. You won’t be able to exclude the part of the gain that’s equal to any depreciation deduction allowed or taken after May 6, 1997, Luscombe says.

If your trust is a revocable living trust, which is designed to avoid probate, your ability to take the home sale exclusion won’t be affected. Other types of revocable trusts may require the home to be taken out of the trust before it’s sold, Luscombe says. If it’s an irrevocable trust, the sale of the home generally would not qualify for the home sale exclusion, he says.

You should discuss this with a tax expert before proceeding, and consider reviewing other options for reducing taxes. For example, if you kept this home until death and bequeathed it to your heirs, there probably wouldn’t be any tax on the appreciation that occurred during your lifetimes.

Filed Under: Q&A, Real Estate, Taxes Tagged With: capital gains, home sale, home sale exclusion, real estate, rental, Taxes

Q&A: Many factors go into rental choice

November 19, 2018 By Liz Weston

Dear Liz: You recently answered a reader who didn’t want to keep and rent out the home she inherited with her brother. You mentioned that if he refused to buy her out, she could go to court to force a sale.

Another option is to hire a property management company to provide a buffer between the siblings but also between them and the tenants. The house will provide a healthy income to both bro and sis.

Answer: Actually, we don’t know that. While Mom-and-Pop landlords can make a tidy profit with single-family homes in some areas, just breaking even is hard in others. In many high-cost areas of the country, rents aren’t enough to cover the considerable costs of ownership, especially if the property still has a mortgage.

Even if it’s paid off, the house could need extensive repairs or be damaged by future tenants. Vacancy rates could be high in that area, and the property management company would still need to get paid. The siblings also will need additional liability insurance to protect against being sued.

The sister could get a much better return from investments that require a lot less from her. Mutual funds don’t call to tell you the roof is leaking or the furnace needs replacement.

The home could turn out to be immensely profitable and still be a bad investment for a sister who’s an unwilling business partner and who resents the brother who refused to buy her out when he had the opportunity.

Filed Under: Q&A, Real Estate Tagged With: follow up, Inheritance, q&a, rental

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