You may have heard of the 2 out of 5-year capital gain exclusion. If you live in your primary residence for 2 of the previous 5 years, you can take an exclusion of up to $250,000 (single) or $500,000 (married filing jointly) when selling for a gain.
But not so fast.
There is a “gotcha.”
If you move into a rental property, you don’t get to exclude all of your gain. Instead, you need to do an allocation between the time your property was a rental and when you lived in it as a residence.
Also, if you had a rental, you may have also had depreciation expense. You need to recapture and pay tax on the depreciation no matter what.
If your primary residence started out as a rental, you’ll have to pay some tax when you sell at a gain no matter how long you live in it.
This is another one of those issues where you need to make sure you have accurate and up-to-date information when you search on the Internet.
Here is more information on this subject:
Tax law is rapidly changing. What was a great strategy a few years ago might not work at all anymore. In fact, some of the best tax strategies of “old” could end up costing you a lot more in taxes.