During the recession, some homeowners were not able to sell and chose to rent their homes instead. These homeowners did not need to sell their home at the depressed prices and opted to rent it until the market recovered.
This strategy is valid, but there are time restrictions that could have serious tax
implications for some homeowners.
Enter the section 121 exclusion for gain in a principal residence. This requires that the home is used as a main home and owned by the homeowner for at least two years during the five year period ending on the date of the sale. Section 121 allows a homeowner to rent their home for up to three years and still have some part of the exclusion available.
Selling a home with a $200,000 gain that qualifies as a principal residence would result in no tax being paid by the owner. Comparably, selling a rental property with the same gain could have a $30,000 or higher tax liability depending on the length of ownership and tax brackets of the investor.
Our housing market has improved dramatically in the last year. If you have a home that has been rented less than three years, was a principal residence at one time and you have a gain in that home, it might be time to sell it while you still qualify for the exclusion. You may not be alone, there may be many homeowners with homes for sale in Northern Virginia in this same situation.
Be sure to consult with your tax professional for advice when considering a sale on a principal residence that is or has been rented. For additional information, see IRS Publication 523.
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