I have a house that I bought for about $260 20 years ago. Originally I lived in it but around 10 years ago I started renting to misc tenants. It is not profitable and I am losing money every month. I am thinking to renting to a family instead which would be less hassle and more revenue. It is now worth about 800k . I am single so it is a tax problem if I sell. First of all is the basis what I paid of the value when it became a rental property? If I move in and ultimately sell I will have large tax to pay. If I sell it as a rental property and do an exchange for another property I might get more revenue and it could be a house that is more up to date. I suppose I could take a little money out at that time.
This property is in Maryland close to Rockville and I am concerned about whether it will continue to appreciate. There have been massive layoffs here and the population of federal employees is no longer flourishing. I should also mention that I am now 80 years old and want to get things more organized in the event I become disabled or die.
Thanks in advance for your suggestions
Posted by Special_Active_6669
2 Comments
The basis is what you paid for it, plus the cost of any improvements since you bought it, minus any depreciation you’ve take or could have taken during the rental years. When you sell, an amount of the gain equal to the depreciation is taxed at a maximum rate of 25%, and gain above that is taxed at normal long-term capital gain rates. If you move back in and live in it for at least two years, you can qualify for the $250k residence exclusion, but the unrecaptured depreciation stays with it. So, no matter when you sell you’ll have a significant tax bill, only less so if you qualify for residence gain exclusion. If you think the market is near its top, your best course might be to sell it and enjoy the after-tax proceeds.
If you still own the property when you die, your heirs will get a basis step-up that will greatly reduce if not eliminate the gain when they sell it.
In Rockville, since property has appreciated over time, likely the basis you used for depreciation was the adjusted basis at time of conversion. You will have depreciation recapture first taxed at ordinary income tax rates (subject to 1250 max 25% rate for real property depreciated on a straight-line basis), and then the remainder of your gain will be a long-term capital gain taxed at those rates. That’s if you just sell.
You have a lot of different scenarios laid out and those all have different tax implications. Beyond just telling you how a sale would work, you are best working with a CPA on all these other scenarios to figure out which would work out best.