Can I Exclude Capital Gains Tax on a Rental?
Find out whether a rental property qualifies for the home sale capital gains tax exclusion.
Q. "I'm purchasing a new home and plan to keep my current one as a rental for a few years, instead of selling it right away. When I do find a buyer, will I be able to exclude the captial gains tax?"
A. One of the benefits of being a homeowner is that you get some nice tax perks. One of the biggest is the home sale capital gains tax exclusion. It allows you to avoid paying tax on a big chunk of profit you may receive from the sale of your main home.
Ordinarily, when you sell a capital asset--such as real estate, stocks, or collectibles--the difference between what you paid for it (also known as the basis) and what you sell it for is a capital gain or a capital loss. If you sell an asset for more than your basis, you have a capital gain that is taxable.
However, the home sale exclusion is a special situation that gives you the opportunity to avoid gains of up to $250,000 or $500,000 if you're married and file a joint tax return, on qualifying real estate.
To be eligible for this tax benefit, you must have owned and lived in your home for at least 2 of the previous 5 years prior to the sale date. That means you can exlclude capital gains on a rental property that used to be your primary residence, as long as you don't wait too long and miss the deadline.
Otherwise, the full amount of profit you make on the home sale will be subject to tax. For complete information read Publication 523, Selling Your Home.
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