question about avoiding capital gains?

Question

what would you do to avoid capital gains. you own a home and have had it rented out for 4 years. you are moving back to the us, where it is, and you want to sell it for something smaller. any way of avoiding capital gains without moving into it for 2 years?
thanks

Answer 1

As long as you lived in the property for 2 out of the 5 years immediately prior to the sale you can avoid tax on up to $250,000 ($500,000 if married filing jointly) in gain on the sale.

If you are active duty military, the 5-year clock stops when you are given orders out of the area. If you lived in the property for at least 2 years prior to receiving your PCS orders you can still claim the exemption from capital gain taxes on the sale. This "clock stop" lasts for up to 10 years while you are on continuous active duty.

If you are NOT active duty military, you will have to move back in long enough to have 2 full years occupancy out of the last 5 years immediately prior to the sale. Since you have been absent from the property for 4 years, that will mean you will have to move in for at least 2 full years.

One thing to watch out for. Although you can exclude the gain on sale if you move back in or otherwise qualify, you must recapture any depreciation allowed or allowable while you were renting it out. If you took $10,000 in depreciation deductions while renting it out you will have to pay capital gains tax on that depreciation regardless of your exemption status. If you don't qualify for the exemption, the depreciation will be added to the taxable gain that you do realize.

For example, if you paid $200k for the house, sold it for $300k and had $10k in depreciation, your taxable gain would be $110k if you don't qualify for the exclusion and $10k if you do qualify for the exclusion.

Answer 2

2 ideas: 1. My understanding of the law is that it has to have been your primary residence for 2 of the previous 5 years, so live there for a year. 2. If you plan to purchase another rental, it may qualify for a section 1031 exchange - allowing you to push the gain into another property. BE CAREFUL with this - they are complicated and you will need an attorney who is experienced in handling them. Another consideration - Cap Gains rates are at historic lows. You might just consider paying them and patting yourself on the back for making a good investment.