Question: I have a rental property that I have been renting out since 2006. I plan on moving into the home next year and want to sell it in a few years. What are my tax consequences of this plan?
Nancy S, Nashville, TN
Answer: There are no tax prohibitions to moving into a rental property and subsequently obtaining the tax benefits of the capital gain exclusion under Section 121 of the Internal Revenue Code. When you sell the rental property, you will need to pay taxes on the amount of depreciation that was claimed while it was a rental property. The tax rate of this “depreciation recapture” is 25%. In addition, any gain that you have on then property (after depreciation) for any period of time after 2008 that it was a rental property is not excludable. For instance, if you rented out the property in 2009 and 2010 and the property increased in value by $20,000 during these 2 years, the $20,000 would be taxable as a gain and not excludable. The good news here, especially if you convert from a rental to a personal residence in 2010, is that it is likely that the property did not go much (if at all) in these 2 years due to the current real estate conditions. As long as you live in the home at least two years as your personal residence after converting it from a rental property, you will be eligible for a capital gains exclusion of $250,000 (single) or $500,000 (married filing a joint tax return).