January 2009 Newsletter
New Tax Law Concerning Turning Rentals into the
Family Home
Real estate professinals need to be aware of the tax law change
in July 2008. This new law goes into effect January 1, 2009.
Assume that Paul and Karen are getting divorced in December 2008.
They own several rental properties. Karen is to keep one of them
and she decides to move into rental.
It used to be that if Karen wanted to sell the house after 2 years,
she could apply her full $250,000 exclusion against the gain. But
now the IRS wants part of those capital gains taxes that were accrued
during the time it was rental property, starting January 1, 2009.
Scenario #1: Karen moves into the rental in December, 2008. She
sells this property in March 2011. There is a $240,000 capital gain
which she is able to wipe out with her $250,000 exclusion because
the house was not a rental as of January 1, 2009.
Scenario #2: Karen does not move into the rental but continues
to keep the property rented out as she wants the rental income.
Four years later in 2013, she moves into the rental. Two years later
in 2015, she sells this property. There is a $240,000 capital gain.
She is only able to able to wipe out 2/6 ($80,000) of the capital
gain with her exclusion. She will have to pay taxes on the remaining
$160,000. And she will also have to pay tax on depreciation recapture.
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