How to Sell Your Rental and Pay No Taxes
The current tax law allows individuals who are selling their main home to exclude a gain of up to $250,000 per individual ($500,000 on a joint return). This is fantastic if your personal residence has appreciated in value and you are selling it for a nice gain! Can you imagine buying a home and selling it years later while not paying any taxes? Well this is exactly what many people did during the housing boom before 2008. They bought and sold their personal residence and took advantage of appreciated values to make money and not pay any taxes.
So how can you take advantage of this tax law and sell your rental properties without paying any taxes? It’s really quite simple. The law says that if you used the house as your main residence for 2 out of the last 5 years then it will still qualify for the capital gain exclusion. That means you can live in a house for 2 years, rent out the property for 2 years, then sell it within 1 year and any appreciated value is tax free money. The trick is to make sure you close on the sale of your property within 3 years of your last use as a personal home.
Now that you have this information about how the tax law is written you can take advantage when doing real estate investments. After living in your home for two years you can setup a lease purchase agreement that will allow your prospective tenant the opportunity to purchase the home at a higher value. The down payment amount is the gain that you want to accomplish 2 years from now. The closing date will be 2 or 3 years from the date of last personal use. Now you just have to find the tenant who wants a new home.
The great thing about this tax free transaction is you don’t need to continuously use the home as your primary residence during the 2 year period. As long as you have 24 months within the 5 year period then you can still sell it tax free. You can read more about the law in IRS Publication 523. I’ll tell you how to take advantage of this during real estate sales in a future post.