Convert rental property to primary residience

You don't state, but imply, you want to move into this property and then sell it at least two years later.

There is no longer a free ride on excluding gains due to living in home

2 of 5 previous years, that loophole was closed. (Not to mention that there was always at limit on the amount of gains you could exclude). Starting 2009 you have "nonqualified use" for the rental years prior to when it became your residence, you have to pro-rate your gain exclusion, if any, for that. Prior to 2009 the nonqualified use is grandfathered in. (I'm glossing over some details and doing this from memory, but this is the gist of it).

Also, while there is no depreciation recapture in your situation (assuming you were depreciating straight line), there is tax on unrecaptured Sec. 1250 gain, which is probably what you are thinking of. This gain is not excludable from tax, it is taxed at up to 25% (but not more than your ordinary tax rate). I'm not aware of "strategies" to eliminate it.

Thanks Mark. That's great information and very helpful. It looks like our best option may be to just sell our primary residence, take the allowable exclusion from the gain, and then buy a new "downsized" home to use as our primary residence.

And, maybe we can defer the tax on any gain etc. from a later sale of the rental property buy doing a 1031 exchange and using the sale proceeds to buy another like-kind property.

We will definitely see a qualified tax professional who can review all of our particulars before taking any action either way. But this helped us in sorting out what some of the possibilities may be. Thanks.

Thanks Mark. That's great information and very helpful. It looks like our best option may be to just sell our primary residence, take the allowable exclusion from the gain, and then buy a new "downsized" home to use as our primary residence.

And, maybe we can defer the tax on any gain etc. from a later sale of the rental property buy doing a 1031 exchange and using the sale proceeds to buy another like-kind property.

We will definitely see a qualified tax professional who can review all of our particulars before taking any action either way. But this helped us in sorting out what some of the possibilities may be. Thanks. ================ Be careful about the like-kind exchange idea. Giving up real estate that was in business use and getting real estate which will be used personally is not a qualified exchange. Also, exchanges don't have "sale" proceeds.

Note that not all of the capital gains are tax-free. Only 500k if married are tax free. Also as Mark points out, if the house was converted from from rental to personal then you have to pro-rate the exemption.

I thought it is taxed at 15%.

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Thanks. I didn't explain what I meant very well.

I was saying that it would probably be better for use to just sell our primary residence, take the allowable exclusion, and buy another smaller primary residence rather than move into one of our rental properties.

And, if we were to ever sell one of our rental properties (without having lived there etc), maybe to avoid (defer) paying any tax on the gain or any unrecaptured Section 1250 gain, we could do a 1031 exchange -- meaning sell the existing rental property and buy a like-kind rental property through a

1031 exchange.