Have you seen anything in the new tax law which would impact tax situation re converting rental property to a primary residence?
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DreamboatAnnie's Account Talk
- Thread starter DreamboatAnnie
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Have you seen anything in the new tax law which would impact tax situation re converting rental property to a primary residence?
https://apiexchange.com/impact-2018-tax-law-real-estate-owners/
Dec 21, 2017 - Property owners will still have the ability to convert a residence into a rental property or convert a rental property into a residence and qualify for tax exclusion benefits under both the primary residence Section 121 rules and also potentially qualify for tax deferral on the rental property under the Section 1031 ...
DreamboatAnnie
Well-known member
I read a Forbes article that says: "... the final bill maintains the exclusion for capital gains from the sale of a primary residence. This means a taxpayer who sells a home may exclude up to $250,000 of gain from taxation ($500,000 if married filing jointly) if he or she has owned and used the home as a primary residence for two of the past five years. Earlier versions of the bill would have increased the ownership and use requirements to five of eight years, and kept higher-income taxpayers from claiming the exemption at all.". (I.e. section 121)
So, this is where rental comes in, must own the "rental" for at least 5 years but live in it as Primary residence for last two years. Then if you sell it you can exclude up to $250K of the gain". So this is where more research is required. Does that exclusion only apply to the capital gain or does it include the tax on recaptured depreciation which is viewed as ordinary gain? I need to look into that too. I need to find the actual section. I had read that you could include the depreciation taken during the years the house was a rental into your gain and then apply $250K/$500k exclusion....possibly wiping out the gains completely.
I had heard about the possible increase in ownership and use requirements last year (5 and 8 years). But I did not want to live in one rental that is heavily depreciated for that long (5 years) and so I had started looking into doing a "like kind exchange" (i.e. Section 1031) with replacement/exchange for residential rental house in area I like better, for possible conversion to primary residence later..... but it started to get so complicated.... Decided to keep it for a few more years.
The like kind exchange rules seem too hard...gotta have the sale proceeds from sale of rental go to a third party (I have trust issues and maybe I just don't know enough about this) and then close on replacement property within 6 months, plus there are filings that must be done in order, and processed on time. I definitely would need to find reliable third party to hold funds in trust, etc and find out how much they charge and/or find out IF a relative can act as third party.
https://www.forbes.com/sites/samanthasharf/2018/01/09/what-in-the-final-tax-bill-could-impact-your-housing-costs/#37898e9d2c08
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DreamboatAnnie
Well-known member
The BIG deal regarding residential rental property: There is a new 20% exclusion of rental income (net) for all pass through entities including sole proprietors and even for schedule E filers. Looks like you do not need to incorporate to take advantage of this. But definitely want to see how IRS puts it out. They could see this differently so I want to see official IRS information before I start celebrating.
Two seemingly good articles:
https://www.nolo.com/legal-encyclopedia/how-the-republican-tax-plan-affects-landlords.html
https://www.fool.com/taxes/2018/01/03/can-you-win-from-the-pass-through-deduction.aspx
Two seemingly good articles:
https://www.nolo.com/legal-encyclopedia/how-the-republican-tax-plan-affects-landlords.html
https://www.fool.com/taxes/2018/01/03/can-you-win-from-the-pass-through-deduction.aspx
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My rentals always run at a loss due to depreciation so I wonder how/if I can do that 20% exclusion pass through thing..I dont have a clue what that is?
bmneveu
Well-known member
Would you mind providing details on why you are losing money? The income / equity gain isn’t enough to offset damage / maintenance? Curious because I have a rental as well.
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DA, while looking for information about how the new tax law might affect the conversion I saw an article which indicated that there was a tax law change in 2009 which seemed to require a proration of the gain if the property was used for anything other than residential i.e. rental. For example, if it was rental for three out of the past five years 60% of the gain could be taxable? The depreciation recapture also seemed to apply to the taxable gain portion. Didn't see anything in the new law which would change this provision. You are exactly right this is a very complicated section of the tax law especially the like kind exchange rules! Suggest a good tax expert who is familiar with this section of the law. Good luck to us all!
evilanne
Well-known member
Interesting. Wondering if you pay someone else to manage the property, would you be eligible for the deduction?
i need to do more research on topic of moving back into existing rental and how it works, as well as like kind exchanges. Thinking if I decide to move using exclusion on sale of existing home and moving into current rental (rented for ~12 years) for a 3-4 year period and either selling (using exclusion but paying recapture on depreciation) or buying another house and return it to a rental property (assume depreciation would continue with adjusted basis for any capital improvements). Doesn't seem like there is any way around recapture when sold unless I die and it would pass to heir at a stepped up basis. How to Convert Real Estate Rental to Personal Residence | Home Guides | SF Gate gives one example where the recapture is lower than the actual depreciation taken but it is when the sale price is lower than the adjusted basis, so basically in a loss position.
The like kind exchange rules are definitely confusing and currently beyond my comprehension.
https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031 This is starting to make my head hurt :headache:
Basically, i dont keep it rented like i should. Depreciation and property tax is so high it is very close to the rental reciepts even when I do have it rented. 8500 bucks a year for rent. Cost basis was 125k over 27 years so like 4k from that. 2.2k property tax, mowing. If I pay some off rent utilities that's a grand or two.
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sgtbriangreen
Member
Here is another tough question since I own a rental property too. What if your LLC owns the property. The LLC sells that property to do a like kind swap. The LLC buys a new property and YOU are the new renter? I have done 0 research on this, but I plan on building in 10-12 years.
DreamboatAnnie
Well-known member
Gosh...had not heard of that change. I definitely need to read a few pubs on this. That change would make it so you must stay in house for five years before selling. Or do like kind exchange, rent out that second property but it would need to be house you plan to retire in or live in for minimum of five years. Sell current primary home after second home has rented for two years and take exclusion on primary, and then move into the second rental to convert it to primary. Ugghhh....so convoluted!!! would definitely need to read up on sale of like kind exchanged property too.
DreamboatAnnie
Well-known member
Hi KB, I would go out to Zillow and look for rentals in your rental's zip code and see how much rental properties are renting for that are about same condition and size. If your renting way below that, do new contract with current renters and up the rent every 6 months, if it's legal in your State. I understand rent..rule of thumb is 10% of property value. Of course it depends on how high property taxes are in your area. If your not capturing enough to save for larger reairs and covering yearly taxes and insurance and earn at least 7% of value of property, then you should consider if investing elsewhere would be better.
Best wishes!!!!! :smile:
DreamboatAnnie
Well-known member
I'm exiting. Probably not the best day to exit, but this was a very weak dead cat bounce that did not retrace even 50%---although I guess it could in the coming days. I'm sure market will eventually rebound... but at this point, I need to stop the bleeding. I will live to fight another day. I will likely will be -3.5% by the end of day if the selling does not accelerate in afternoon. Hoping its not more than 1.2% drops. I can fix that but anything larger would be emotionally difficult. I hope it recovers in the afternoon. Time to switch to downtrend strategy.
Best Wishes to Everyone on your Investments!!!!!!! :smile:
P.S. Just checked intraday charts and looks like buyers are stepping in.. well at least for last 45 minutes... prices moving up a bit so now only at 1.09% drop. hum... makes me feel so much better!
Best Wishes to Everyone on your Investments!!!!!!! :smile:
P.S. Just checked intraday charts and looks like buyers are stepping in.. well at least for last 45 minutes... prices moving up a bit so now only at 1.09% drop. hum... makes me feel so much better!
Good luck DBA...I pulled the plug after the two horrible drops so your probably still ahead of me...This market will come back but my risk tolerance is pretty low. Fun to think I almost pulled back to the g fund the thursday before the big drop..then cancelled the transaction. that was a 26 thousand dollar mistake..LOL Just have to keep telling myself it was never my money to begin with.. good luck with your moves and I'll see you on the other side of this crap!! haha
rangerray
Active member
Me too. I was out right near the top. Then, after listening to a few say how much further this market could go, I got back in because of my greed (and also because I thought “they” knew so much more than I did).
So, now I’ve went and spread my money amongst C, S, and I while hoping that tomorrow is a better day.
I feel bad because I’ve actually hoped for an opportunity like this once more before I retire; and now I’ve only managed to waste it.
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So, now I’ve went and spread my money amongst C, S, and I while hoping that tomorrow is a better day.
I feel bad because I’ve actually hoped for an opportunity like this once more before I retire; and now I’ve only managed to waste it.
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DreamboatAnnie
Well-known member
Hi KB and RR,
It's really tough to take. I'm now around -5% in the hole, but I'll dig out. Really awful though. Need to remember that next time the market rallies sharply, I should watch for a 10 EMA crossing below 13 daily EMA as exit signal. If the growth is not steep, then that would have you in and out a lot...but for what we've been experiencing since last quarter and through January... That is the only indicator that could save you. I forgot about that.....plus greed. The quickness was like 1987 flash crash.
One thing that I have learned is that no one truly knows what will happen. You will have "experts" tell you the sky is falling ad others telling you to stay in and keep buying and all will be good. I think technical indicators help assess market but nothing is perfect. In fact, the more I study it the more I realize there are too many factors that play in. Sentiment mixed with seasonality and indicators is huge and a help, but even that is not full proof. Also, the algorithms, quick instant trading, 2 ad 3times leveraged ETFs and margin calls all play in too. then we lowly government employees and other pension plan/401k plans with limited dinosaur age type trading makes it so these guys are stealing candy from the babies. Totally sick! But IMHO that s due to lack of regulation and capitalism. We need better guns!!!! :smile:
It's really tough to take. I'm now around -5% in the hole, but I'll dig out. Really awful though. Need to remember that next time the market rallies sharply, I should watch for a 10 EMA crossing below 13 daily EMA as exit signal. If the growth is not steep, then that would have you in and out a lot...but for what we've been experiencing since last quarter and through January... That is the only indicator that could save you. I forgot about that.....plus greed. The quickness was like 1987 flash crash.
One thing that I have learned is that no one truly knows what will happen. You will have "experts" tell you the sky is falling ad others telling you to stay in and keep buying and all will be good. I think technical indicators help assess market but nothing is perfect. In fact, the more I study it the more I realize there are too many factors that play in. Sentiment mixed with seasonality and indicators is huge and a help, but even that is not full proof. Also, the algorithms, quick instant trading, 2 ad 3times leveraged ETFs and margin calls all play in too. then we lowly government employees and other pension plan/401k plans with limited dinosaur age type trading makes it so these guys are stealing candy from the babies. Totally sick! But IMHO that s due to lack of regulation and capitalism. We need better guns!!!! :smile:
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DreamboatAnnie
Well-known member
Got a little more info on this topic. Very good article. So you must prorate and pay tax on part of gain on sale of home converted from rental to primary residence and 25% on recapture depreciation. however, if the property started off as a principal residence, the rules limit the proration...which is good for me as one rental started as a primary residence. Very complicated.
But whoooo is me because recapture tax on depreciation does not go away, or at least not that I can see. So looks like this one will need to be like kind exchange (probably rent it for short tine while I sell primary) and then convert new like kind rental to primary and live there forever and pass it on via inheritance. Now need to confirm if conversion to primary (no sale) triggers tax bill.
Info on 2009 change
https://www.nolo.com/legal-encyclopedia/taxes-when-you-convert-your-rental-property-your-personal-residence.html
Like kind exchange... Love the last sentence.
How to Sell Rental Property and Not Pay Capital Gains | Home Guides | SF Gate
Oh yes plus pay 3.8% Obama healthcare tax in some cases...need to see if that's still in place for sale of home
What Will Happen to My Taxes If I Sell a Rental House? | Home Guides | SF Gate
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DreamboatAnnie
Well-known member
This would not be an "arms length "transaction, so I'm not sure IRS would recognize new like kind exchange property as rental if they learned of it.
DreamboatAnnie
Well-known member
Hello SBG, adding on......So depreciation and other expenses would likely be disallowed by IRS.
I'm a bit confused about the described transaction. Your LLC owns a rental home now, and in 10 years it will exchange that property for a new home you personally build in 10 years. So you personally would own the old LLC's rental, and the LLC would own the house you newly built and then you would rent the new home from the LLC?? If that is how it would work, it looks illegal because not arms length and would result in your LLC writing off all repairs, insurance, property taxes, and depreciation and all other expenses while avoiding limitations caused by having to personally itemize and only getting to deduct expense amounts exceeding the standard deduction on only taxes and insurance. I'm thinking I would reconsider follow trough on that plan. :smile:
Add on for my last post: You just move into (like kind) rental to convert it to primary residence. Looks like no tax consequence until you sell it.
sgtbriangreen
Member
Gotcha. It was just a thought in my head. I had done 0 research on the practicality.
