Q: I am 67 years old and own a rental property. I would like to sell the home but don’t want to pay taxes on the gain. Should I live in the property for two years and then sell it?
I’d like to avoid paying capital gains taxes on the sale. I am still working but I’m in the poverty income tax bracket. The house has no mortgage but the taxes, insurance and utilities are eating up my savings. Is there any way I could declare a hardship and avoid the capital gains taxes?
A: Before you make any decision, you need to know what effect the sale of your home would have on your federal income taxes. If you don’t make much money now, you’re probably not paying much to the federal government. If you know what sales price you might get from the sale of the rental property, you then can decide whether to sell it and not worry about the tax consequences.
However, if you’ve owned the property for many years and the taxes you owe will be quite large, you may have some options to limit the amount you pay without fully eliminating the entire tax bill.
The only sure way to defer the payment of capital gains and other federal income taxes on the sale of rental properties is to use a company that specializes in 1031 exchanges. When you use a company that handles 1031 exchanges you basically sell the current investment property, place all the proceeds from the sale with the exchange company and buy a replacement investment property of like kind within a certain time period.
Using a 1031 exchange will allow you to sell the property, but won’t let you get to the money. That money would be tied up in the new property you would be required to buy.
It seems that you probably want to sell the property and keep the money. If that’s the case, you won’t want to use a 1031 exchange. You’ll need to sell the rental property outright.
You talked about living in the rental property for at least two years. Well, when it comes to your primary residence, if you have lived in the primary residence for two out of the last five years, you can exclude from federal income taxes all profits up to $250,000 (or $500,000 if you are married). But the key there is that the home must be your primary residence and you must live in the home for two out of the last five years.
In your situation, you could move out of your current home and into the rental property and live there at least two years. But a couple of years ago, the IRS changed the rules: If you owned a rental property that was later converted into your primary residence, you would still have to pay capital gains and other federal income taxes due on the sale of that property based on how long the property was an investment property and how long it was your primary residence.
So moving into the home would not eliminate your obligation to pay capital gains taxes or other taxes to the federal government, but over time would decrease some of the tax obligation.
Still, it’s worth finding out exactly what you’d owe. Because the highest capital gains tax rate right now is 15, you might find that if you sell the property now, you won’t pay all that in capital gains taxes.
But you may owe more to the IRS because you have to recapture any depreciation you took on the property over the years.
Real estate investors typically take a tax break on their federal income taxes by depreciating the property. That depreciation may result in a reduction in your federal income taxes previously paid. When you sell the rental property, the federal government requires you to repay that benefit previously given to you at a rate of about 25 percent.
In other words, if you took $100,000 in depreciation on your rental property over the years, you’d owe $25,000 to the government when you sell.
Given all of this information, you need to understand what you ultimate liability would be if you sold the property. If you have someone that helps you with your federal income taxes, you can work with that person to see what it is you might have to pay if you sell the rental property.
How about seller (owner) financing with a 7-10 year amortization….could spread the taxable income over a longer period and still realize income on a monthly basis. The Safe Act permits this, as long as it is in his personal name and not a corporation, LLC or other entity.
What are the tax implications of owner financing the sale of a rental home?
I bought a mobile home in 1998. I still owed on the mortgage in 2008, and decided since I wasn’t living in the home, I would lease to own the property to a nice old couple. I messed up and didn’t have the mortgage company put the additional money I included on the loan in payments I made during this itme. The older couple completed all payments we agreed on, on time and was within 3 months of paying what we had agreed upon. I borrowed money from my 401k to pay the rest of the loan off. And gave them a clear title to the home. I made no income on the property, I actually lost about 9K. How the heck do I file my taxes for 2013?