Unfortunately, sometimes dreams don't come true. In my quest to simplify life, I was blinded by the belief that the rental property I bought in 2003 would also be eligible for the full $250,000 / $500,000 tax-free profit exclusion if I moved back in tomorrow and lived in it for the next two years before selling.
I believed this to be true because I sold a rental property in 2017 that was eligible for the full $250,000 / $500,000 tax-free profit exclusion. I only rented out the property for 2.5 years after living in it for 10 years prior.
Taking Advantage Of The Tax-Free Profit Exclusion Rule
With this new rental property I'm considering selling, I lived in the property for two years (2003, 2004), and then have been renting it out for the past 14 years. Even if my family moved back into the rental for two years, we'd only be able to get a prorated tax-free profit exclusion equal to the length of time we lived in the property divided by the entire length of ownership.
That's normally the case for rental properties bought after January 1, 2009. However, a law was passed since I bought the property where all use of the rental prior to January 1, 2009 is deemed as “qualified use.”
In other words, the prorated amount of our tax-free profit exclusion would equal Qualified Use / Years of Ownership. Numerator = 2003, 2004, 2005, 2006, 2007, 2008 + 2018, 2019 (moving back in for two years) = 8. Denominator = 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019 = 17. Prorated amount = 8 / 17 = 47%. If my gain is $720,000, then my tax free gain = 47% X $720,000 = $338,400. With a 27% effective tax rate, my tax savings = $91,368.
Earning tax-free profits of $338,400 is better than a poke in the eye. However, it is certainly not as enticing as earning $500,000 in tax free profits as a married couple. And to clarify, I'm not limited to 47% of the $250,000 / $500,000 number.
I'm limited to 47% of the gain. That gain is then limited to $250,000 / $500,000. In other words, at a 47% prorated amount, I can have a capital gain of $1,063,829 before I run up to the $500,000 limit as a married couple.
Tax-Free Profit Exclusion Examples Of Using IRS Code 121
To make further sense of the tax-free profit exclusion when selling a home, I invited Amy, a law partner and fellow property owner who went through this same exercise to elaborate.
he spoke on this subject before when I first considered selling this rental property several years ago, but I forgot. This is why it's so important to make sure you write out your thesis and explain it to as many people as possible BEFORE making a large financial move.
Internal Revenue Code § 121(a) (tax-free profit exclusion rule) says: “Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.”
For an owner who buys and moves into the property, lives there for at least two years, and later sells it without ever renting it out, the exclusion is simple. You get all of it. But for owners who have turned their primary residence into a rental for some portion of that time, the nuances of § 121 become important.
Examples illustrating how the tax-free profit exclusion works:
Background facts: Bob buys a place on January 1, 2003 for $500k. It’s now 2018, and he is planning to sell it for $900k. He’s trying to figure out how much capital gain he will have. He also wonders whether he should move back into the property for tax savings.
Scenario 1:
When Bob bought his house in 2003, he moved in right away. He lived there until January 1, 2016, and started renting it out after that. He plans to keep it rented until he sells it. So long as he sells it before January 1, 2019, all of his use is “qualified use” under § 121. The last three years of rental property usage is included in “qualified use” under § 121(b)(5)(C)(ii). That means all of his capital gain is potentially eligible for the exclusion.
His total gain is $400,000, but it’s subject to the $250k/$500k caps in § 121. If he’s single, he can take the $250k exclusion, and he pays capital gains tax on the other $150k. If he’s married, he can take the full $400k exclusion so long as he OR his spouse meet the ownership requirements and so long as both he AND his spouse meet the use requirements for the property.
To the extent that Bob ever took depreciation deductions on the property, either for “home office” or other business use while he lived there, or depreciation he took for having the property as a rental, that amount of capital gain must be recognized and taxed (“recaptured”) under § 1250, irrespective of the capital gains exclusion we’re discussing here.
We could spend a whole day going on about that code section, so for now, we’re going to set that issue aside. Just keep in mind that with each of these scenarios, you first pay capital gains on the depreciation recapture, and then you run the math on the exclusions applicable under § 121.
Scenario 2 (A tricky one):
Bob bought his house in 2003 and moved in right away. He lived there until January 1, 2016, and started renting it out after that. But it’s mid-2018, and he’s worried he might not be able to sell it before January 1, 2019. So, to make sure he doesn’t fall short of the 2-out-of-5-years rule, he kicks his tenant out and moves back into the property on July 1, 2018.
Well, Bob just shot himself in the foot. The exception for the 3 years of rental property usage only applies if it’s after the last date that Bob used the property as his primary residence. By moving back in, he turned that 2.5 years of rental property use into “nonqualified use.”
Now he has to prorate his gain. Assume he sold on December 31, 2018. His “qualified use” ran from January 1, 2003 through January 1, 2016 (13 years), plus July 1, 2018 through December 31, 2018 (half a year), and his “unqualified use” was 2.5 years. So 13.5/16 years are “qualified,” and about 84% of his gain is potentially excluded. $400,000 capital gain x 84% = $336,000. The remaining $64,000 of his gain is subject to tax.
There's More To Calculate
But we’re not done yet. Of that $336,000 potentially excluded capital gain, Bob can take only $250k of it if he is single. If he is married (and if both Bob and his spouse meet the use test), he and his spouse could take the full $336k exclusion.
If Bob continues to live in his old rental, then his prorated capital gains inclusion will continue to grow, but never back to 100%. For example, if he lived in the property until Jan 1, 2022 (for three more years) after moving in on July 1, 2018, his exclusion would be 16.5 / 19 years, or 87%.
The best thing Bob should have done was kick out his tenants with enough time to sell before Jan 1, 2019 to get the full exclusion and not move in before then.
Scenario 3 (the tax law changed on Jan 1, 2009):
Now let’s assume that Bob rented out the property early on and moved in later. Bob bought his house in 2003 and rented it out immediately. Starting on January 1, 2009, the tenants moved out and he moved into the property. He's now considering selling the property today.
All of Bob’s $400k capital gain is potentially excluded. All rental property activity prior to January 1, 2009 is considered “qualified use.” This new proration portion of § 121 kicked in on January 1, 2009, so all rental usage before then is a freebie, so long as you meet the 2-out-of-5 rule before you sell. If Bob is single, he can take a $250k exclusion. If he is married (and if both Bob and his spouse meet the use test), he and his spouse could take the full $400k exclusion.
Example 4 (another tricky one):
Similar to Example 3, but Bob moves into the property even later. Bob bought his house in 2003 and rented it out immediately. Starting on January 1, 2014, the tenants moved out and he moved into the property.
Now we’re back into proration territory again. Bob’s qualified use consists of the 6 years he owned and rented it from January 1, 2003 until December 31, 2008. Plus the 5 years he lived in it from January 1, 2014 until December 31, 2018. The rental period from January 1, 2009 through December 31, 2013 (5 years) is unqualified use.
So 11/16 years are qualified use, and about 69% of the gain is potentially excluded. $400,000 capital gain x 69% = $276,000. Of that $276,000 potentially excluded capital gain, Bob can take only $250k of it if he is single. If he is married (and if both Bob and his spouse meet the use test), he and his spouse could take the full $276k exclusion, and the remainder would be subject to capital gains tax.
You can see more details from IRS's website.
Go Through The Numbers Carefully
I'm sure a number of you are still confused after these examples. Just read each scenario multiple times and ask for clarification and you'll eventually get it. The tax-free profit exclusion can be confusing.
The bottom line: in order to qualify for the full home sale exclusion under the Code Sec. 121(a) two-out-of-five year ownership and Use Rule, the non-qualifying use (rental property, office, etc) after the owner leaves his principal residence can’t exceed three years.
After three years, you must prorate the exclusion by taking the number of qualified years divided by the total years of ownership if you have lived in the property for two out of the last five years. If you don't meet the 2/5 rule, you get no exclusion at all. Not even proration.
For those of you who've owned rental property for a long time (i.e. 10+ years) and are sitting on large gains, it doesn't seem worthwhile moving back into a rental to try and save on taxes. Instead, the best move is to hold onto your rental property for as long as possible. You want to avoid any selling costs and capital gains tax. Or, you can do a 1031 Exchange and buy a new rental property with the proceeds.
After going through this exercise, my family is probably not going to downgrade our lifestyle by moving back into our two bedroom rental. We could save maybe up to $43,200 $91,368 in capital gains tax as a married couple. But it's not worth it. We still get to add in capital improvements to increase our cost basis and lower our tax bill. We want to live life to the fullest now.
The Future Looks Bright
Sometime in the future, we may put the condo on the market once our tenant's lease runs out. Then we will do a 1031 Exchange into a more expensive property in Honolulu.
We'll rent out the Honolulu property for at least one year to legitimize the property as a in-kind rental. Then in 1-4 years we'll move into the property and make it a primary residence. This will be just in time for our son to go to pre-school or kindergarten.
Or, we'll just keep both properties. Then we will hire a property manager. Afterward, we will save diligently to buy a Hawaii property when it's time to move. I've always felt the best to buy property to enjoy rather than to rent out. There is an issue with keeping both SF properties. I'll need to find some way to save $1 million more since I won't have the proceeds from the 1031 Exchange.
Guess I can't slack too much with Financial Samurai!
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Hi there, i have a somewhat tricky question that is baffling me and i am not able to find the answer, will try to explain here.
current date is 9/20/2021.
i have a home purchased on October 2020 which i use as a primary residence, i am also buying another home in same city which will be ready on Feb 2022 , builder is asking me to occupy the new house as primary residence for two years. here is my dates:
1st house purchase date = 10/2020
lived in 1st house until = 1/2022 (15 months)
moved to second house = 2/2022
lived in second house until = 2/2024
1st house rented period = 2/2022 to 2/2024 (2 years)
moved back to 1st house = 3/2024
sold 1st house = 1/2025
in above scenario i have only 50% gain as qualified period, please correct me if i am wrong.
If we file jointly our income will be $169,831
If I file separately and claim the capital gain my income without capital gain would be $22,607
I believe because this is a long term capital gain if I filed married filing separately I would owe 0% on the Capital Gains due to my tax bracket if my husband and I filed jointly our long term capital gain rate would be 15%.
Are we better off filing married jointly or separately?
Also we plan on selling our current primary residence after 2 years and will make more in profit off of tha thome than the rental I sold last year. We won’t be able to take an exclusion on my rental property because I only have it as a primary residence for a little over a year. If I file separately and only owe 0% of capital gains does that count as our exclusion? I want to be able to take the exclusion next year on our Cave Creek home.
Do you have a good calculator you like to use to determine capital gains if it was first purchased as a primary residence?
Also we were trying to estimate how much we would owe in Capital Gains Tax. Do you have a good calculator for this? We did live in the home for over a year but less than the two year period. Can you let us know how this would be pro rated for us? Our combined income was about $160,000 before the profit of the sale of our home. I bought the home on January, 27th 2017 and turned it into a vacation rental on February, 4th 2018 so it was a primary residence for 373 days. I sold the property on May 1st 2020 as a rental property so it was a rental property for 817 days. I purchased the property pre marriage for $215,000 and sold the property for $260,000 with $10,074 in selling fees to reduce the Capital Gains Tax. We are filing married jointly. I did qualify for unemployment due to the pandemic back in March 2020 not sure if that helps? I think we qualify for long term gains since we lived there over a year. I think our long term tax bracket is 15% but we did claim depreciation in 2018 and 2019.
Carol that is correct.
Also, I am a tax accountant at a CPA firm – just in case you are looking ;)
If we file jointly our income will be $169,831
If I file separately and claim the capital gain my income without capital gain would be $22,607
I believe because this is a long term capital gain if I filed married filing separately I would owe 0% on the Capital Gains due to my tax bracket if my husband and I filed jointly our long term capital gain rate would be 15%.
Are we better off filing married jointly or separately?
Also we plan on selling our current primary residence after 2 years and will make more in profit off of tha thome than the rental I sold last year. We won’t be able to take an exclusion on my rental property because I only have it as a primary residence for a little over a year. If I file separately and only owe 0% of capital gains does that count as our exclusion? I want to be able to take the exclusion next year on our Cave Creek home.
I believe there is a limit on the gain that is sheltered from tax. In the main article’s example the gain was $720k and the excluded fraction was 47%. The author is married filing jointly, therefore the maximum amount sheltered from tax is $500k * 47%, not $720k * 47%.
Here’s another question….my head is spinning! We sold a rental in 2013 and did a 1031 exchange into another in 2014. The second rental has appreciated about 150k so far (it’s in a currently sought after area). Our accountant told us that we need to live there for two years to avoid capital gains, so we sold our primary residence and moved in last september, thinking we would make some improvements and sell in october, 2020, thus giving us the 2 years out of five. If I’m reading your article correctly, we would still owe tax basedon 3/5 of the years, correct? Do I need a new accountant? Lol
My wife and I bought a home and immediately rented in Jan 2013. Rented: 2013, 2014, 2015, 2016.(4 years) In Jan of 2017 we moved into it as our primary residence. We plan to sell it in the latter half of 2019. Primary residence 2017, 2018, 2019 (3 years). Total years of ownership will be 7.
If I sell at the end of 2019, is my numerator 3 and denominator 7? (42.8%) So assuming my gain is $400k, my excludable amount is limited to $171,200 = ($400k x .428)? Did I do that correctly?
If so, does this mean that if I had purchased the property in 2015, (2 years later), instead of 2013, and the property was not rented for longer than 3 years in the last 5, it would not be necessary for me to prorate the exclusion? Thanks for any clarification.
Speaking of 1031 Exchange. I have a property I want to 1031 exchange…but I want to buy a lot and build a new house. Is it possible to buy the lot, pay for it, then use the 1031 exchange …and have the builder build me a new house. Or, would I have to sell my lot to the builder and have him build me a new house on the lot he purchased from me? Does it have to be just one single transaction to qualify? And if so, if I sell my lot to him and then repurchase the lot with a new house on it, would that meet the requirements of the 1031 exchange? Any ideas on this approach?
So glad I saw this, this is NOT well known, thank you!!
Hi Sam,
Have you ever done a podcast regarding a formula or rule of thumb regarding selling an investment property vs. renting it out? I heard you talk about making the decision to sell your investment property and you mentioned some percentage figure (“200x rent”). Can you elaborate please?
Thank you,
Jenna
Incredibly useful article. Thanks, Sam. This is definitely something I didn’t know, either!
Great post! Am a longtime FS reader and appreciate that § 121 can get very confusing. On your invitation to provide more examples and clarification, a while back I wrote a comprehensive post on this exact topic that may help shed light/insight on the nuances and intricacies of how this confusing area of real estate tax works.
How to avoid capital gains taxes when selling your house: IRS rules, exceptions, and exclusions for residential real estate sales with $250k – $500k in capital gains:
hackyourwealth.com/avoid-capital-gains-taxes-selling-house-irs-rules-exceptions-exclusions
Hi Sam,
I’ve been reading your blog more than year and it’s really help me with real estate investment.
This topic was right on. I purchased a condo in Orange County in 2009 and have been living till 2018. My husband and I just purchased new home in OC while I’ve not decided what to do with my condo.
1) I like to rent it out and try real estate investment. Since I’ve living this condo about 10 years, I can make $375-475 profit per month if I rent it out. I used HELOC, Roth IRA, and saving for 20% down for new house. I can pay monthly HELOC bill from the rental profit, however I would not be able to renovate new house since I used all liquidate cash saving for now.
2) If I decided to sell the condo, I can pay off HELOC and renovate house by gain from the condo. It’s simple transaction.
New mortgage will increase $1,500 from current mortgage, and I have two daycare cost till September 2019. After that, it will be only one daycare cost, but after school fee, $1,000 decrease.
My question to you is that renting my condo is too risky with my condition. Or it’s good investment if I can figure out cash flow.
If you can give me some advise, I would appreciate it a lot. Thank you.
Wow. I can do a back-of-the napkin scribble of how much in legal advice this article would cost in an attorney’s office and I am thankful for your blog my friend. (But YES, I understand that this is NOT legal advice, nor are you offering it as anything other than your own thoughts)
I have bookmarked this as a reference, but our exit strategy has always been to buy and hold until we either run out of depreciation, the rental market tanks, or capital projects make it unfeasible as an investment property. Then, like you mentioned, 1031 into a new property and repeat. We hope to leave all property to the kiddos so they can pay the fancy lawyer bills or keep exchanging it and save the CG for our grandkids or beyond.
Thanks as always. Will try and get some responses to some of your questions in one day, but this post was pretty deep and will take several more passes before I could even form my own questions.
Have a great week! – FS
Sam, have you considered a Deferred Sales Trust? I don’t know a lot about how complex or costly it might be, but it sounds like an intriguing way to defer the tax hit.
https://www.realized1031.com/blog/the-other-dst-deferred-sales-trust
Thanks for writing this one. It sounds like we will get prorated at best. 1031 exchange might be the easiest way to go for us too.
Our duplex.
September 2014 – 1031 exchange our old rental home to duplex.
rent until December 2018
Move in and live there for 10 years.
So we’ll get about 71% (10/14) exclusion, right?
I thought if we live there more than 5 years, we’d get 100% exclusion. I guess that’s wrong.
“during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.”
It’s probably best to 1031 exchange into a different property and start over.
Does qualifying use hold across the 1031 exchange?
Our old rental home.
purchased in 2000
Converted to rental in 2007
1031 exchange to duplex in 2014
This is very confusing.
I think the depreciation recapture may be due regardless of whether one claims depreciation or not.
However, it may still be better to pay the tax now, rather than get more appreciation (1031 exchange included) which may lopsidedly trap you into too many real estate type assets.
The reason for realizing the gain sooner rather than later is that it is almost certain that taxes will be higher in the future. There is a near majority of Americans — and growing– who aspire for all things European (healthcare, housing, transportation, regulation) and thus the inevitable state that consumes fifty percent of GDP or more.
Ever wonder why there are not that many FI Europeans? They pay too many taxes to ever achieve escape velocity. Most of the Europeans that practice FI do so on minimalist thirty thousand $ yearly budgets, and a near hippy lifestyle.
I’m betting that this is one of the epiphanies Financial Samurai and many in the American FIRE community will have at some point in their lifetimes…
It is one thing to visit these wonderful welfare countries as an FI American and its a very very different experience trying to bootstrap yourself into FI as a European resident.
You might like: I’ve Seen The Future And It Looks So Bright, regarding America becoming Europe. It’s hard to raise taxes once they’ve been lowered. The majority will only raise taxes on the minority.
What is the epiphany I will realize eventually exactly? That Europeans will have a tougher time to FIRE? Or that I will need to live a near hippy lifestyle myself? Not clear.
Related: The Three Levels Of Financial Independence
The epiphany?
That you and your offsprings will become the primary target minority of this future “that looks so bright”.
That being said, no bright future can be had on a national economic growth trajectory that is structurally less than half the world average growth rate. I would expect that people who live and breathe by compounding — and certainly understand the extreme exponential differences between a long term growth of 1.5% vs 4.5% — to also readily understand this long term reality.
One of the main skills I’m giving my children is teaching them to be mobile. That is why I came to America in the first place. Mobility may well prove to be the most useful skill. Pitchforks can rise anywhere at any time. Everything human moves ever faster. National and continental declines that used to take centuries will now conclude in a few decades. Our children will see more changes in their lifetimes than the past four generations combined –things that are truly unimaginable to us today. That is the exponential nature of growth. Like a person who finally FIREs, humanity is close to reaching escape velocity.
Be mobile. It will likely prove the most valuable skill. Especially for your little one.
PS. Taxes are difficult to raise once lowered? That could not be further from the truth. The almost universal economic reality of this world is that governments keep consuming ever larger percentages of GDP. How does that happen? It only happens through ever more taxes, visible and less visible.
Phew. Good thing taxes were lowered starting this year for the next 4 years to give ourselves a buffer for the inevitable uptick then.
When do u plan to retire or leave America?
I am retired. I retired in my early forties. Once I was able to free myself of the chains imposed by European electorates I came to America and took flight. I will probably leave America when the pitchforks gain critical mass on this side of the Atlantic, or when I’m done milking the wallets of Bay Area environmentalists and nimbys who choked off housing supply and ended up being my renters because they cannot afford anything else. I mean, I’m actually sad about it, I would have rather made money in different ways, but when a population is set on suiciding then you might as well be in the hemlock business.
BTW, inevitable uptick [in taxes coming] it is. Had the tax reductions been accompanied by a reduction in federal spending then yes, there was hope. But the tax reduction was actually paired with an actual increase in government spending — increase well above and beyond inflation, setting the path to Greece. The recent tax reform / reduction remains unpopular with a majority of Americans. Perhaps they do understand that without more taxes the bright future Financial Samurai has seen will remain a dream….
So, I also don’t understand why then go to such lengths to avoid paying taxes? Is the redistribution/philanthropy that the state imposes so repulsive, especially when it will be used to implement the bright future you have seen? For someone who seems to be promoting giving and philanthropy this obsession with tax avoidance seems like a rationally dissonant position — one dissonant stance held by many FI bloggers I must say.
Do pay the tax and the state will do some good redistribution. Not as good as your charities of choice perhaps, but is government redistribution so abhorrent to invest so much time in avoiding it?
Got it. I think most Americans want to retire abroad for the free healthcare and more socialist system.
Yes, there are even American FI bloggers who extoll the virtues of socialist healthcare systems and then “vow to never pay taxes again”.
Wow that must have been one difficult post to write!! Talk about the complexities of the tax code. Phew! Boy it is so confusing but you did a really great job explaining it all in ways that make sense! I had no idea the law changed in 2009. Either I wasn’t reading much in the news back then or the law change wasn’t as big as the ones we’ve had this year. Thanks for bringing so many intricacies to light for us!
Hello,
I’m extremely confused …. how did you get the 500k last year for your sell but wouldn’t be able to do it for this sell?
We have owned a house for 32 years, lived in it for 15 and then rent it until 2013 when we moved back in for two years and then decided to move back to Oregon, so we rented the house for another two years. It had been vacant for almost a year and we are planning to sell, and I can’t figure out if we will get the $500k. Asked a couple of CPA and we are getting different answers.
Thanks for the help:)
Sure. Your total years of ownership is 32, so 32 is your denominator if you have lived in the house for two out of the past five years. Have you?
For your numerator, your qualified years are all the years you owned the house before January 1, 2009 + the years you used it as a primary residence after Jan 1, 2009. But you have to have lived in the property for two out of the past five years.
So what did u do with the prop between jan 1, 2009 and now? Write out each year.
Good morning! So this is very confusing…. I read that if your property was a primary residence (for us 15years) and then rented it but as long as you lived back in it for the 2 out of 5, you can get the whole 500k exclusion. Is that what you understand too?
Thanks!
Yep, But it depends on what years. Calculate the numerator and the denominator and you’re all set.
Hey Sam,
If you 1031-ed into your Honolulu property, waited the year to move in and make your primary and then ended up wanting to sell down the line, would the tax obligation from the initial 1031 Exchange become due?
Yes, the tax obligation is due if I sell The Hawaii property in the future. So the key is really to hold on forever or continue to do a 1031 Exchange, To defer taxes.
This might be too in the weeds of a question, but can you then open up a HELOC on said property? I ask because if you did 1031 into a $1 Mil property, which you essentially can never liquidate, then that’s quite a bit of capital tied up.
I think you probably can. I never do. Tying of $1 million in a property is a lot depending on your net worth and current cash flow.
The volcanoes are providing a short term sale in Hawaii….time to take advantage and purchase real estate?
Timely post Sam! I sent my accountant the following information to figure out what my final tax bill will be if I sell my SF condo this year. I came up with about $15k in taxes.
Hi Denis,
Hope you’re well. I’m considering selling my SF condo once the lease is up this July. I’m calculating how much I’ll have to pay in taxes given I purchased it in March 2000 for $605,000. There’s been about $75k in improvements over the past 18 years which were all done back in 2002. I lived there until late 2008 and have been renting it out ever since. Zillow has the place valued around $1.22m. I’m single. Any idea of the taxes I’ll owe on this potential sale including any depreciation we have to account for? Happy to chat about it if that’s easier for you. Thank you!
I think you were right when you said we may need to read through the examples a few times, hah! I am starting to come to an understanding of this, though, so thank you!
I like your idea of the 1031 Exchange for a property in Hawaii, especially since you aren’t looking to move until your son is old enough for school. It seems like now would be pretty good timing to start that process if he goes in a few years. It seems as though keeping the properties might be too stressful in the long run.
Either that, or you could just move yourself and your parents down here to Florida – we have beaches, Disney, cool alligators, and it’s all a bit cheaper ;)
FS, this series has been very compelling, thanks very much to you and your network of legal and real estate tax experts for putting so much time and detail into this. Also, we readers really appreciate Mrs. Samurai and what a great sport she has been during your moves and remodeling! You cannot put a price on what a great wife-and-mother you have locked down!
Please show her the calculation of the Capital Gains savings you are foregoing, because you respect and care for her happiness. If you were to ask her to move again, who knows what it might cost you! :-)
Continued success, you are piling up wins!
I think that a rational spouse is more or less a prerequisite for FI. Without that you face too many headwinds.
Great review! What in the world would Airbnb be in this pool of confusion…
Hi Sam, Great article!
A couple of things.
1) I noticed a comment from you recently that you don’t like it when people do not respond to your questions. I did not know. So, for that I am sorry for not responding on a few of your questions previously. I will work to not let it happen again.
2) Can you speak to how Home Selling Transaction costs impact the numbers in these examples? Here is the situation. My wife and I bought a home in 2012. We live in it until 2018 and then started renting it out. If we were to sell today, we would probably fetch 1 million. Taxes and fees would come out to about 90k. This would mean I would get 410k tax free for my wife and I. If I were to sell for 1.1 million with 100k in taxes and fees, would we get the 500k tax free and no other taxes because of the transaction costs? Or is there something else I’m not taking into account?
This is super interesting to us and will require more review for sure! We just moved back into a property we bought in 1995 as a foreclosure for $44,500. We rented it for 22 years (to the same tenant…for the same rent…) and now we live there. We just put about $100,000 into it as it needed to be remodeled. We added a huge master bedroom and another bathroom too. It is now worth about $185,000. We have no plans of selling at this point and we may turn it back into a rental (it’s right across the street from a beautiful 17 mile lake and has an unobstructed view and a county park across the street.) We do need to find out the tax implications if we sell this year, if we stay for the two year minimum – and how the 22 year prior rental play into things on top of the remodel adding to the basis.