The simple rule of thumb is the basis of the new property is equal to the adjusted basis of the relinquished property plus the amount of any cash (included debt) given minus the amount of any cash (including debt received).
Let’s say that you paid $50000 for your rental property several years ago and over the years you took $30000 in depreciation. Your adjusted basis in this property is $20000. Let’s also say that this property is now worth $100000. Let’s also say that you own this property free and clear.
You do a like-kind exchange for another rental property that is worth $150000. You agree to give $50000 and your property in exchange for the new property. Your basis in the new property is your original adjusted basis of $20000 plus the cash you contributed to complete this deal, resulting in a $70000 basis in the new property.
To compute your depreciable basis, you have to allocate your $70000 basis in the new property between the land and the improvements. The easiest approach is to take the appraisal for the new property and look for the appraiser’s estimate of the land. Now divide the value of the improvements by the total appraised value, then multiply this result by $70000. You have now computed your depreciable basis in the new property.
I understand today, if your sell you?re primary residence and you have occupied the property for the past two years. The capital gains up to 250K for a single person is tax-free and does not need to immediately be re-invested into another property if ever.
I have a rental property that has been rented now for 13 years. If I was to move into the property for two years and then sell it. Could I take advantage of tax-free capital gains even though it was rented previously? And could I continue to do this with my other rental properties?
I know your are gonna suggest I talk to a CPA which I plan on doing, but would like to educate myself a bit more before I shell out a few hundred dollars to some CPA that might not know anymore that some over the brilliant people on this board.
If you move into the former rental property and use it as your primary residence for the next 2 years, you will qualify for the Section 121 exclusion, meaning up to $250,000 (assuming you’re single) of capital gains is excluded from your income. EXCEPT, that all of the depreciation previously taken on the rental will be “recaptured” and you will pay tax on that. Didn’t depreciate the rental? Too bad. You still have to recapture the depreciation that you were allowed to take. No way around this.
Example: You paid $80,000 for the house 13 years ago. It’s now worth $150,000. You took $20,000 of depreciation over the last 13 years. You us it as your personal residence for the next 2 years & sell it for $150,000. You have a gain of $90,000 ($150,000 - $80,000 basis + $20,000 depreciation). You will pay tax on the $20,000 of depreciation being recaptured, but the remaining $70,000 is considered capital gains and will qualify for the section 121 exclusion.
Baze, You’ve written such a clear and analytical response, I’m hoping you can help me with a question. I’m thinking about doing a 1031 exchange on a rental that I have been depreciating for 11 years. Will the depreciation liability be transferred to the new property or do I start out fresh? Thanks. -D
Although I could not find an answer to one more question I have. Both my brother and I are on the title. So do we both have to live in the property or will they allow just one of us to live it?