Personal Residence Sale - Taxable Gain Exclusion

Q. I moved out of my personal residence eight years ago and made it into a rental. Can I move back in and then sell it and exclude profits under the IRS gain exclusion rule for personal residences? Mike S., Columbus, Ohio

A. Yes, you can! If you moved back in, and live in the property for two of the next five years, you can sell it and exclude any gain, up to $250,000 for single and $500,000 for married couples. This is a great way to go to save yourself substantial monies that you might have paid to the taxman.

There is one major tax issue. You probably took depreciation on that rental property during the period it was a rental unit. So you already received tax savings from that deduction, and once you sell it in a couple of years, you'll have to "recapture" that depreciation and pay taxes on it. This is totally separate from the two-out-of-five-year personal residence exclusion.

Regarding depreciation recapture, let's say you took $3,000 per year in depreciation on your rental property for 8 years. That's $24,000 of depreciation tax savings. Going forward it will be a personal residence at the time of sale, so you can exclude the normal gain on sale, except the part of the gain related to the $24,000 depreciation. That $24,000 will be included as part of your income and it will be taxed.


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It can get a little more complicated based on the year a seller took the depreciation, so someone like yourself should always get competent tax guidance before you do any large dollar transactions. Depending on what you plan to do with the monies, like buy another personal residence, you might look at tax minimization strategies related to IRS 1031 exchanges too. Good luck!

Tenants Not Paying Rent on Time

Q. My tenants are often late paying rent and while I do get late fees, it ends up being a major, stressful hassle dealing with it every other month. Any suggestions? Tia N., Macon, Ga.

A. Sorry to hear about that. Yes, what a pain. Most owners would rather have the rent on time instead of collecting late fees. It is stressful, calling tenants, listening to their reasoning, and then waiting for, and wondering if, rental checks will actually arrive.

I'd suggest you try to coach your renters into paying on time. You might consider letting them know how much extra they've paid you in rent and asking what is the issue that causes them to late pay. Maybe they get paid on the 5th, not the 1st, and that's why it's never there until the 8th.

If you understand the reasoning, that might help. Some of my tenants get paid on the 5th or 10th and I just set the rent due a few days after that date. That works really well for them and I'm not worried about rental checks arriving on time as I know they pay right after they get paid.

If that doesn't work, you could also give them incentive to pay on time if they are otherwise good tenants. Maybe offer $20 off rent if it is deposited into your account on time, or $100 off a future month of rent for a good payment record, or little or no rent increases next year if you get paid on time.

It's always best to try to keep decent tenants instead of re-renting the property. Of course, if late payments get to be too stressful, or there are other reasons, you could always give notice at the end of their lease and work hard to find better tenants the next time around.

Leonard Baron, MBA, is America's Real Estate Professor® - his unbiased, neutral and inexpensive "Real Estate Ownership, Investment and Due Diligence 101" textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com