San Francisco Real Estate - Residential

Turning your personal residence to rental can be a super tax break!

First American Exchange recently sent us a great tax saving tip of turning the home you own outright into a rental property if you are so inclined. Here's what they say:

"...Did you know that you can avoid paying tax on more than $500,000 of gain on your home? Many people are aware of the advantages of Internal Revenue Code Section 121, which allows a married couple to exclude up to $500,000 of gain on the sale of their personal residence ($250,000 for a single taxpayer). Although this amount of gain is generous in most areas of the country, in California and a few other states, many people expect to receive more than $500,000 of profit when they sell their home...

"... (For example) John and Mary Smith have lived in their home for twenty years. They acquired it for $100,000 and it is now worth $1 million, so if sold, they would have $900,000 of gain. If they sell it without converting it to a rental, they would be able to exclude $500,000 of gain but would have to pay state and federal capital gains tax on the additional $400,000 of gain.

"John and Mary Smith decide, however, to convert their property to a rental. After renting it for a year or two, they sell it for $1 million. Since they used the home as their personal residence at least two of the past five years, they are able to exclude $500,000 of the gain. They can then use the remaining funds to acquire replacement investment property and defer paying tax on the balance of the gain.

"In order to completely defer the remaining gain, the traditional rule is that the investor must acquire property with a fair market value equal to or greater than the relinquished property, and must invest all of the equity from the relinquished property into the replacement property. When gain has been excluded under Section 121, the amount of value and equity required is reduced by the amount of gain that was excluded..."First American publishes its own newsletter and is free to subscribe.

- Mick Orton

posted by SFResidence.com @ 8:39 AM