If you’re one of the so-called “accidental landlords” who is leasing out your prior primary residence because you couldn’t sell over the past few years, you may be in luck when it comes time to sell. A recent change to the Taxpayer Relief Act has expanded tax exemptions on capital gains from selling real estate… with a few provisions, of course.
You might recall that in 1997, the Taxpayer Relief Act was born and provided millions of Americans a way to avoid paying taxes on the profits from selling their homes. Specifically, single homeowners were allowed to profit up to $250,000, while married couples were allowed up to $500,000 in profits from the sale of their primary home. Well, a lot has changed in the American tax laws since then, but the capital gains provision is one which maintained its advantages for many homeowners. In fact, there are even a few added bonuses since its inception. Before recent changes to the Taxpayer Relief Act, the tax-free gains on the sale could only be used to purchase another home. But now Uncle Sam is allowing homeowners to do whatever they’d like with the profits from a primary home sale.
Now that home prices have begun to rise again, albeit slowly in some areas, homeowners are now selling their homes and taking advantage of pocketing what would otherwise have to be forked over to Uncle Sam. But, before you contact your local real estate agent, there are a few things you need to consider; after all we are talking about taxes here. While Uncle Sam is being extremely generous with this rule, there are certain criteria which have to be met.
First, and foremost this law applies only to a primary home in which you have lived for at least two years prior to selling. Don’t panic if your home is rented now because there’s also a stipulation which allows a homeowner to have rented for a couple of years as well, as long as the home has been owner occupied at least two years within a five year period prior to selling. In other words, if you lived in your home for at least two years then rented it out around 2011 or afterwards, you are eligible to sell your home and keep any and all profits up to $250,000 (if single) and $500,000(if married) all to yourself. The even better news is that you do not have to be residing in the home when you sell it.
Lenient as Uncle Sam may be with homeowners, he is not so generous with investors. Unfortunately, investors who purchased properties for the sole purpose of renting them out are not allowed this same tax break. In fact, even when investors have made similar moves and occupied a previously rented home within the same time frame (two of the last five years), there is still no allowance for the break on capital gains. The sole purpose of the home purchase must have been for owner occupancy in order to qualify.
This is good news for any homeowner, but especially for those living in areas that have either fully recovered or are well on their way such as Miami, Denver, Dallas and a few other cities in Texas, and more where homeowners are likely to see some real profits.
For homeowners in other areas on the rise, it’s time to start watching the clock and remember this formula, 2:5 (two years of occupancy within a five year period before selling).
Conceivably, for those accidental landlords who found themselves praying for a break over the past few years from tenant tantrums and plumbing problems, your prayers may have been answered.
Are you an accidental landlord poised to take advantage of this change in tax law?