The Tax Advantage Of Selling A Rental House That Has Also Served As Your Personal Residence

One of the most advantageous tax benefits available to individuals is the ability to exclude from taxation a gain on the sale of a personal residence. In contrast, a gain on the sale of a rental house that has appreciated in value is usually taxable. However, individuals who sell a house they have used for both rental and personal use may be able to exclude a portion of a sales gain from taxation.

You might have sold a rental house that previously served as your personal residence. If you owned and resided in the home for at least two out of the five years preceding the sale of the property, you meet the residency requirement to exclude part of a gain. Your two years of residency can be any two years within the five years preceding the date of sale.

Calculation of excludable gain

For purposes of the personal residence gain exclusion, any time period that the house is rented is referred to as a non-qualified use. If you sell a house that has been used for both rental and personal use, you generally must prorate the gain. The gain attributable to the period of non-qualified use cannot be excluded from taxation. If the house was rented before 2009, however, there is an additional tax consideration.

Rental periods before 2009

Any rental period before 2009 is not automatically considered to be a non-qualified use. As a result, the sale of an older rental property may result in a greater portion of a gain qualifying as excludable income. Regardless of how long you owned the house, you still have to meet the 2-year residency requirement.

Personal residency requirement

The 2-year residency requirement is not necessarily 24 consecutive months. The 2-year period can consist of any 24 full months within the five years preceding the sale. Alternatively, you could have used the home as your personal residence for at least 730 days out of the five years preceding the date of sale.

Some real estate investors may even consider taking up residency in one of their rental houses, especially if the property has been owned for several decades. The tax benefit of meeting the 2-year residency requirement depends on how much the home might have appreciated in value during your time of ownership.

For a single tax filer, the exclusion of gain on the sale of a personal residence can be as much as $250,000. For a married couple filing jointly, the exclusion limit is $500,000. Contact an accountant for more information about the tax consequences of real estate sales. For more information, contact companies like The Callen Accounting Group, PLLC.