2-Year Tax Rule

I know that if you live in your primary residence for two years you can sell it without paying capital gains tax. My question is can you keep your house and rent it out and then buy another one and tell your mortgage broker that this is a primary residence, instead of a second home?

Detailed explanations would be greatly appreciated.

Jimmy

If the new property that you are buying will be your primary residence, why would that be a problem.

What WILL happen, in all likelihood is that they will factor your investment income in when they figure your loan ratios…most will count 75% of the rent that you are paid into the equation for income.

This means if you have a house with $750 in expenses and you rent it for $1000 ($250 cashflow), you will break even in the mortgage broker’s eyes.

Make sure that you also understand that you can live in your house for 2 years, rent it for almost 3 years and still not have to pay capital gains tax if you sell. You must have lived in it for 2 years out of the last 5 years.

Keith

in addition to the last post, be aware that some mortgage lenders will only count the rent income if it shows up on your Fed taxes from last year. Others will want to see the leases. Thus for the purposes of buying the new residence, you will probably need to be able to qualify without counting income from your soon to be rental.