Selling a Temporary Rental

Temporary Rental2.pngSome people who bought at the height of the real estate market decided rather than sell their home at a loss, kept the property and rented it out – choosing to wait 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 your primary residence for at least two years during the five year period ending on the date of the sale.  This allows you to rent your home for up to three years and still have some part of the exclusion available.

If you sold a home with a $200,000 gain that qualifies as your principal residence you would not have to pay any tax. Comparably, a rental property with the same gain could have a $30,000 or higher tax liability depending on the length of ownership and the tax bracket you are in.

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.