Renting out your home, tax law changes
I've rented out my home after 13 years in it, and am living in a rental. Apparently, the tax laws on capital gains have changed for a home that is converted to a rental. It used to be you got an exemption of $500k/couple if you lived in the home 2 of the past 5 years. Now they will prorate the exemption based on the fraction of total ownership that the home was rented out. Does ESPlanner reflect the new tax law? I'm also wondering if I'm missing some depreciation deductions by using "special receipts" and "special expenses" to input the net income from the rental. What is the best way to input this scenario?
Thanks,
Rick
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The federal/state tax updates happen for the February release, so if this change happened in the latest tax changes passed by Congress, no it won't be represented.
Occasionally we update major things (like the one year tweak the Bush Congress passed for the AMT) mid year, but it's rare and we have no plans at this time to chase the recent changes prior to the February release.
In addition, we don't keep track of things like you moving into a rental unit that you've owned so we have no direct way to model this and prorate the tax deduction.
Basically you're going to have to be clever and figure out the tax liability and enter that as a special expenditure the year you sell your home.
Best,
Dick Munroe
I guess I can do that, provided that the program isn't calculating the taxes based on the old law. That would be hard to undo. Is that the current behavior - ignoring capital gains taxes on the sale of real estate? This is not clear from the help file.
Thanks,
Rick
The new law appears to be (judging from what you've said) a modification of that so that instead of 500k as a deduction, you get some factor x * 500k. So let ESPlanner do it's thing and give you the $500K deduction but include in the year of sale a special expenditure of the appropriate size to make up for the deduction that you shouldn't have gotten (x * $500k).
Say that you had lived in the house for 9 years, rented it for 1, then sold it. If I understand correctly, you should loose 1/10 of the $500K or an additional tax liability of approximately 50k * .30 (assuming a 30% bracket). Stick in a special expenditure of about 15k for this case and you will approximate the actual tax bite.
FWIW, renting your primary home is seldom the right thing to do and wasn't even under the old laws (my opinion only, your mileage may vary). IIRC, you can report the rental income as ordinary income and incur no reduction in tax benefits upon sale but I may be remembering an old bit of tax law there.
In general, if you decide to convert your primary home to a rental, it's a good idea to talk to a lawyer and set up some sort of vehicle to which you can sell the house, take your personal deduction upon sale of the house, and let that vehicle deal with the tax liabilities associated with the rental. That way you get the maximum deduction upon sale and now have simple rental unit to deal with (I use the term simple advisedly).
Best,
Dick Munroe