Sunday, May 02, 2004

Rent to Avoid Taxes?

Q: My wife and have owned a primary property for 4 years and 9 months. Three months ago we bought another primary home and we are supposed to move to and then sell the other one. If we don't move into this new property and sell it, Does the gain become "ordinary income?". If so, would it be better to rent it out and sell it after two years? If so, would the tax consequences be better? We would greatly appreciate your advice. Thank you very much


A: I’m not sure how the income will be classified – you’ll need to check with your accountant or the IRS web site. However, it will definitely be taxed if you don’t live in it for two of the next five years (they don’t have to be sequential years). If you never move into and sell after two years – the gain will be taxed. The two rules that must be met are ownership and use. You may own it for two years, but if you don’t live in it, then the gain will be taxed.

Here’s one consideration: Rent out your current primary residence, live in the new primary residence, then move back into your old home and sell the rental – THEN, you can get the gain tax free as long as the gain doesn’t surpass the $500,000 limit for married filers. So far this loop hole has not been closed where you can introduce a property into rental use and then move back into it with not much of a tax liability – check with your accountant, however, before making a final decision!