Converting Rental property to Residential one

Converting the rental property back to a (2nd) personal residence will do nothing to change the deadline for selling the CA house and excluding up to $250,000 in gains. That clock started running when the CA house stopped being your primary residence.

Exactly. The "clock" Bill refers to is the rule that says that you get the $250,000 exclusion if you have owned and lived in the home for a total of two years out of the last five.

So assuming OP does not move back in to the home, he can still get the exclusion as long as he sells the home within three years after he moved out.

Oh, and if he gets married before the sale, he gets two exclusions.

Stu

How so, if the spouse never lived there?

A non-owner spouse who did live there can have the exclusion. An owner spouse who never lived there can't.

There were some posts on this newsgroup about a kind of reduction in the exclusion by some ratio of the number of years used as a rental divided by the total number of years. I can't seem to find that info again. Does anyone remember?

Thanks to 121(d)(6), you won't be to exclude depreciation. So if you convert the rental to a second hone, your depreciation will be reduced, but the recapture will be reduced too.

It was in one of last year's housing bills. The calculation now goes:

1. Gain = net selling price - adjusted basis

1. Gain equal to depreciation allowed or allowable after 5/6/1997 is taxed as ordinary income with a maximum rate of 25%.

2. You then calculate the percentage of total ownership that is after

12/31/2008 and not the primary residence. That percentage of the remaining gain is taxed as a capital gain.

1. The remaining gain is available for the 121 exclusion.

-------------- Phil Marti, VITA Volunteer Clarksburg, MD

Sorry, you're right. The other spouse has to meet the use requirement (as her personal residence for two years). But it is not required that they were married at the time, or that she ever owned any part of the property.

Stu

The above reduction does NOT apply to primary residences in the situation described by the OP. It does have the effect of applying to some properties that were rental first, then converted to primary residence.

Bill Brown wrote: [...]

Or to put another way, there is an asymmetric treatment of use other than as a primary residence, depending on whether before or after the two years used as a primary residence. Use before counts against you, use after (up to three years) does not. ("Use before" does not include use before 2009 due to a "grandfather" clause in the new law).

-Mark Bole

So, Alex, marry your tenant. Problem solved. $500,000 exclusion.