Renting Out Your Home

I just had a very interesting case today that I wanted to share with those of you who have a primary home that you turned into a rental property.

Recently I met a couple who lives in Seattle. The wife has a rental property that she has owned since early 1996 which is located in California. The property has gone up significantly in value and they were wondering if this is a good time to sell.

After considering all the improvements made over the years, they are still looking at a pretty significant gain to the tune of over $400k.

Related: How to Rent Your House: The Definitive Step by Step Guide

The Problem:

A good return on their investment but they were not excited when their CPA told them the taxes due on that would be close to $100,000. The property actually used to be a primary home used by the wife and her late husband. Upon his passing, she moved her and the kids up north to Seattle, kept this home as a rental, and later remarried. Over the years, her CPA has been depreciating the property based on the original purchase price of roughly $200k. With the recent price increases in the real estate market, she is now looking at potentially selling this property to free up some cash. The bad news is that with a big gain on the sale of the property and depreciation recapture, taxes due on this potential sale could be a hefty amount.

The Loopholes

During my conversation with the couple, I zeroed in on the fact that this was a primary home once upon a time. Even though this home has …read more