Will we be taxed on the sale of our rental home?

October 6, 2003

Subject:  question about capital gains tax

From:  Andrea
Date:  Sat, 20 Sep 2003

I have a question regarding the sale of a home I own. My husband and I have owned a house in Vallejo for 12 years. We lived in the house up until five years ago. It has been a rental since then. We are also living in a rental. In other words, we do not own any other property. We would like to sell the Vallejo home and buy a home to live in. Will we be taxed? If so, is there a way to avoid the taxation? We should be able to sell the house for about $200,000. However, we still owe about $90,000 on the loan. Any advice you can give would be greatly apprevciated.

Thank you,
Andrea

Answer

Date:  Fri, 03 Oct 2003

The rental home that you own no longer qualifies as a residence, and so doesn't qualify for the exclusion of gain from the sale of a principal residence. Selling the home would be taxable. In fact, 3% of California tax would be withheld from the sale proceeds.

You could make a tax-deferred exchange to another rental house, and eventually convert the rental house to your residence. Two years might be a reasonable waiting period before the conversion.

If you decide to exchange the property, I highly recommend that you work with a good tax advisor and find a qualified intermediary to handle the exchange, or it could still be taxable.

Good luck!
Mike Gray

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