How to Know When to Sell the Temporary Rental
Some homeowners, who were not able
to sell during the recession, chose to rent their homes instead. In some cases,
they didn't need to sell their home at the depressed prices and opted to rent
it until the market recovered.
It's a valid strategy but there are
time restrictions that could have serious tax implications for some homeowners.
The section 121 exclusion for gain
in a principal residence requires that the home is owned and used as a main
home for at least two years during the five year period ending on the date of
the sale. This allows a homeowner to rent their home for up to three years and
still have some part of the exclusion available.
The sale of a home with a $200,000
gain that qualifies as a principal residence would result in no tax being paid
by the owner. Comparably, a rental property with the same gain could have a
$30,000 or higher tax liability depending on the length of ownership and tax
brackets of the investor.
The housing market has dramatically
improved in the last year. If you have a gain in a home that has been your
principal residence and it has been rented less than three years, you might
want to consider selling it while you qualify for the exclusion.
If you are considering a sale on your principal residence
that has been rented, consult with your tax professional for advice on your
specific situation. For additional information, see IRS
Publication 523.