Owner-occupied homes once used as rental property will have capital gains pro-rated between taxable investment income and the primary residence exclusion under tax law changes made when the first-time homebuyer tax credit was grabbing all the headlines back in 2008. This applies to all homes that became primary residences in 2009 and later. This change may have some detrimental impact on the Flagstaff real estate market where some in the past have purchased their retirement homes and rented them before retirement. This could still be a good strategy, just not quite as good. Local Flagstaff folks who moved from home-to-home to convert their rental property investments into primary residences are not too common (it's a lot of work!), but there were a few.
Before this law came into effect, homeowners could live in residential property for two years, then sell and exclude any capital gain up to $500,000 or married taxpayers filing jointly and $250,000 for single taxpayers. Under the new law, even if you live in the house for 10 or 20 years, the gain will be pro-rated between the time it was a rental and the time it was a primary residence. Depreciation taken on tax returns while the property was a rental will be recaptured and capital gains tax will be owed on any gain attributed to the rental years.
With home prices relatively low in Flagstaff now, anyone thinking of retiring to Flagstaff in the future may still be ahead to buy now rather than waiting until retirement. As one of my former accountants once told me, never do anything just for tax reasons!
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To buy or sell any Flagstaff home, contact me: Ann Heitland at RE/MAX Peak Properties.
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