Should we move back into our rental home before we sell it?

August 27, 2014 by Dave Du Val, EA
Woman holding house keys

Hey Dave,

We bought our home Mar 27, 2009, in Arkansas, did major improvements, and then leased it out from Oct 1, 2010, though July 31, 2014.

We now have the place up for sale or will consider another lease because we bought another home in Oregon near the Grandkids.

Should we move back into the house and convert it back to our principal residence or is that a no-no/red flag to the IRS? We are both on fixed incomes and would like to minimize our tax liability.

Carlotta

 

Carlotta,

There was a tax law change in 2008 you should be aware of, because it applies to situations just like yours. Beginning with the 2009 year, any period of nonqualified use (that would be renting out the property as you have done) followed by a period of qualified use (which would be using it as a residence again) results in the amount of excludable gain being reduced. The calculation is rather complicated and is based on the number of days the property was rented after January 1, 2009, until it was sold. You can find more information about this calculation in Publication 523 on the IRS’s website.

Congress put this procedure in place to prevent folks from owning a rental for a long period that is appreciating in value, and then moving into it for a couple of years in order to exclude all of the gain.

Only you can make this decision based on your tax situation and the personal factors you will need to weigh, such as living far away from your Grandkids for a couple of more years.

Deductibly yours,

Dave

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