capital gains

We’re renting our present home that we’ve lived in for 9 years starting April 1st. The rent covers the mortgage and the house will be paid off in 10 years. We live in Las Vegas where housing prices are climbing all the time. I’ve heard it’s best to sell the home in 3 years to avoid capital gains and use the equity elsewhere.

  • Is it true that you have to live in the home for 2 of the last 5 years to avoid capital gains?

  • If that’s true, does it make more sense to sell the home 3 years from now to avoid having to move back in, or continue to rent the home for 10 years or so before selling to retire? We do not want to move back into the home.

Thanks in advance for the advise.


are you still claiming the home as your primary residence??if your not then you will pay capital gains…

If you reside in it for a total of 2 out of 5yrs then you wont pay capital gains for first 500K if your married…Actually i think after 2 consective yrs of living there you can sell…

I wouldn’t sell myself because the cost of selling and purchasing a new property will probably be the same if not more than the amount of tax hit you would get from the capital gain.

You would have to get the property for sale, vacate it, list it and pay commition, wait for it to be sold, then look for another property and pay closing costs, find a new tenant…etc.

I have another house to live in. This would be a rental property. I’m wondering at what point I should sell it. I’ve been living in it for 9 years now but will be renting starting April 1st.


The current tax law is basically: if you’ve lived and owned the property for 2 out of the last 5 years, then up to $250 ($500 if married) of the profit will not be taxed.

If you want to sell under that tax code, then it needs to sell before 3 years has passed. You can’t wait three years, then put it up for sale. 3 years, and one day is too late.

If you rent it during those three years, then you will owe taxes against any rent collected during those years. You may also be charged a depreciation recapture during the rental years whether or not you actually depreciate the property. Reason being, during those years, it was an investment property. Best advice, seek counsel from your tax advisor.

If you’re simply wanting opinions, then I’d suggest selling now if your going to make a good profit doing so, and especially if it’s under your ‘no tax’ mark. Remember, it’s not taxed, so figure that as making 15-30% more than it actually is. Assuming the tax consequences of making it a rental (not to mention the problems of being a landlord), it’s likely that you’ll make more now than you will renting, then selling.

And a final point, don’t ever (even in Nevada) rely on appreciation. All real estate markets have cycles of ups and downs. If it’s a seller’s market now, will it be in 2 years or so? The property may even be worth less then than today if the market suddenly tanked.


I assume you are selling it to get cash out of it. Why not just refinance, pull out cash, lower your expense and get a larger cash flow?

Here is some information to ponder. Do your own research since I am not an accountant and this is all from what “I remember”.

Read the publication from the IRS on selling your house for the real deatails on selling your home and taxation.

As I recall, you must live in the home for 2 of the last 5 years. This does not have to be consecutive, but it must be claimed as your primary residence for at least the 2 year period to be eligible for the exemption. The exemption is currently $250,000 per person or $500,000 for a married couple. There are many rules about how you can use this, so read the publication. Partial exemption, etc. You are eligible for this every 2 years… for now.

I belive that this law will be sunset in 2010 unless extended, however, I could be wrong on the date or entirely.

In 2008, I believe the favorable capital gains rate will increase back to the previous amounts. Currently the long term value is 15%. This will revert to the prevous amount, which escapes me at the moment. So if you need to sell something and are forced to take a capital gain, take it before 2008! I predict you will see LOTS of profit taking in the year and days leading to this event.

Why do you want to sell?
Pain in the a…butt? Refi, lower your payments and hire a management co.
Want to invest in something else? Consider a 1031 exchange.
Need to pay bills? Refi, pull out cash, keep the appreciating asset.

There are other ways to solve your “problem” that keep you in place as an owner of an asset that in just 10 short years will be a cash cow. Or leverage to do your next deal. But to give you the best advice, we need to know what the problem is that you’re trying to solve. Selling the asset is just one solution for several potential problems. The tax ramifications are just the cost of that one particular solution.

Mark Wagner, CPA

I don’t have a “problem”. On the contrary, we are in a favorable position of having 2 homes. We are building a bigger home to live in and renting the current home.

A friend suggested that I sell the rented (current) home in 3 years because the capital gains tax make keeping the property long term a bad move.

My brother in law says, keep the property and in 10 years buy another, more expensive rental, using the rent from the previous unit and the rent from the newest to pay the newest mortgage, thereby lowering my total yearly tax nut (the rent from the old rental is not taxable profit anymore). Then, even though we don’t have a huge amount of cash in our pockets, our net worth is climbing.

I hope I am explaining my situation clearly and I do appreciate this conversation.

In my opinion, your BIL is a smart guy. Don’t have to wait 10 years, either, if the cash flow works. Equity gives you lots of options.

There’s no capital gains tax to worry about if you never sell!

Mark Wagner, CPA

Mark is right. I wasn’t trying to suggest that you should sell, I was just stating some of the relvant concerns of when you do. As you clearly state Mark, selling is just one option. I personally believe you should buy and hold. 10 years of holding will turn almost any marginal property into a good one. If you have cash flow already then you are in a great position. If all you are concerned about is the tax ramifications, then you aren’t looking at the situation from all angles.

How much will it cost you to sell the property in tax costs if you wait an extra 5 years? How much will you save if you sell it in 3? I am willing to guess that just an extra 5 years of rent, tax deductions, and appreciation would cover the extra expense of selling the home if that is indeed what you decide to do.

If all you want to do is unload the property to buy a new once, then you should consider a 1031.