I don’t know about fair but here is the tax rule, You can read it yourself in the Tax Center at www.yahoo.com.
If you?ve owned your home and have lived in it for two of the previous five years, then you can make a profit of up to $250,000 if you?re single or $500,000 if you?re married, with no tax bill.
If the “over two years” means over 3 you are out of luck as far as that rule is concern. You can use a 1031 exchange roll the equity over in to another rental property. But that is another discussion, search for 1031 in the archives.
Posted by Pete Ketchum on June 05, 2000 at 06:55:22:
My wife and I kept our 3 bd 1 bath house when we moved to a larger home. We have been renting it out for over 2 years and we are sick of all of the work. One of our friends suggested that we sell the house “on contract”. What does this mean? I have also been told we will be taxed the equity that we earned in the house if we sell it now that it is a rental. Is this true? That is not fair since 95% of the equity was earned while we were in it? Help!!! What is our best bet for getting out of this house?
Pete,
There are a couple of things you can do here.
First fugure out why you are working so hard on a rental. Rentals are easy, IF managed properly. Do not allow your tenants to direct your course of management. Educate yourself that area. Rentals are a good way to begin building your portfolio of passive income.
Second - If you do decide to sell, use a L/O this places the tenant in buying position (responsible for all maintenance as part of the agreement) and continues to give you the same tax benefits, when the tenant/buyer exercises the option you can trade up to another property via 1031 exchange paying no taxes on the gain.
Third - Sell on contract for deed. You pay taxes on the gains ONLY as you receive them
Fourth - sell outright pay gains or 1031 or possibly pay nothing according to the 1998 tax laws. (consult with your accountant)
Hope these ideas help in some way
Pat