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Want to rent out home but stay in same area, open to many options pls advice

My current home is now too large for my needs. My husband is out of state and works there. I am thinking of moving into a smaller condo/townhome closer to amenities but would like to keep this home. I can move back into the house at a short notice. What way can I plan this to make it better taxwise ? I have considered the following

  1. current house needs to have some work and an addition. Would it be better for me to do it while this house is a primary residence or better when house is being readied for rental ?

  1. I have lived in this house lat 7, so I know I have 3 more years after which if I sell this house I will lose the 250k capital gains deduction

  2. My husband and i will file seperate taxes (I will file as head of household due to the kid) - would it be less messy to hold this property as a LLC ? Will that interfere with converting the house to primary residence again if it is a good idea ?

Thanks

Reply to
sam
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For tax purposes it doesn't matter.

I don't understand this statement. Rules for gain exclusion are in IRS Publication 523.

That means that your husband will have to file Married, Filing Separately, and the family could wind up paying more than if you filed jointly. You can file jointly even though you're currently living in different states. The condition of your marriage is none of our business, but if it's over a divorce would be advantageous from a tax perspective.

No.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Reply to
Phil Marti

The law says you start deducting rental expenses from the time the unit is available for rent. This means that you're advertising it is available for rent and are not living in it. It might take a month to find tenants, so during this month prospective tenants can see the place and you can do repairs and cleaning. Repairs and cleaning would be deductible. As for additions, it does not matter when you do it.

It's actually 2 of the last 5 years. So after 5 years you lose the exemption. Also, if you convert it back into a primary residence, then because your house was both qualified (meaning you lived in it as your primary home) as well as non-qualified (meaning it was a rental or it was your secondary home), your 250k exclusion is reduced.

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to Section 121 The Housing and Economic Recovery Act of 2008 amends Section 121 of the Internal Revenue Code. Section 121 no longer permits homeowners to take the full tax-free exclusion on the sale of real property that was held and used as their primary residence if there was any non-qualified use of the real property prior to it being held and used as their primary residence.

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Try out the tax returns both ways. MFJ may still work out cheaper. Also with MFS you essentially cannot contribute to a Roth.

An LLC makes no difference. With an LLC the rental income and expenses go onto a dfferent form (a 1065) and then a schedule K-1 is generated and the numbers get transferred to your 1040. If you're a one person LLC then the IRS lets you put the numbers directly on your 1040, although your state may differ (like in CA I think there is an extra form to fill out that you attach to your normal 540 individual tax return).

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