Input needed please

Scenario - I have a rental that is being managed by a Property Management company. The PM called me and said that the current tenant who is on month to month basis is asking if I would be interested in selling the house. I am in no plans to sell the house originally but since this call I was thinking as I can save the realtor fee, updating the house to put in market expenses when I plan to see and the taxes on capital gains. Here are my questions.

  1. If the negotiation or deal doesn’t happen then is there a chance that the tenant doesn’t take care of the property? in otherwords will they trash it.

  2. If the deal happen will the PM company needs a fee like realtor?

  3. I turned this house into a rental on Nov 11th 2013 prior to that I was living in the house for 3 years so if the sale happens for example in Dec or Jan then will I have to pay the taxes on capital gains?

  4. The tenant lives on social security and not sure if she can purchase with a traditional mortgage would it be worth while to discuss lease to own option? I have no idea how it works but will do some research. Is this a risky approach or a good agreement by a real estate lawyer will do.

Thanks all in advance for reading and posting replies.


 Yes, this is the perfect time to sell if you want to take advantage of your owner occupied tax credit! The federal law say's "You must have lived in the home 2 years out of the last 5 in order to take $250k as an individual or $500k as a married couple as tax free capital gains". 

An option does not qualify as a sale! Deed must change hands in order to be a qualifying capital gains exempt sale!

Talk directly to the tenant yourself today, no the tenant won’t trash the house if you can’t work a deal but look at the comps and try to negotiate a fair price and you probable have a deal!

I think this will have to close before November 11, 2016 in order that you qualify as owner occupied 2 out of the last 5 years.

Do this as a private party owner / buyer sale, but act quickly as you only have 56 days to close this sale!


Thank you Gold River.

I just spoke with the tenant. She is saying she can’t get a conventional loan till 2 years and wants to do a contract for deed. So since the deed doesn’t change hands till she procures a conventional loan I am not exempt from capital gains tax.

Please clarify.

Best Regards


Two years from now you will have spent zero (0) years of the last 5 years as an owner occupant! So you would be subject to taxes on 100% of your settlement income! You will pay both state and federal taxes on a sale after November 11, 2016. 

Now if she is not on a lease you could start a notice to vacate and put the property on the market tomorrow to try to get a contract and closing before November 11, 2016.

You could sell her the property as a wrap and grant her deed with the note due in 2.5 years or something but you lose your write offs, may have to foreclose to get your deed back if she does not perform, and would probable have to pay her closing costs and increase your note accordingly. You also would need to verify with an accountant that the sale note you hold would be considered tax free under the exemption!

Or sit on the property for X number of years and you will recover net what you would have grossed selling in the next 56 days!

Good luck,


I’m not sure the tax credit goes to zero on nov 17. It probably goes down if you haven’t hit the two years out of the last five, but you should check that.

She needs understand that it will cost a lot of money to do what she is proposing, see if you can get her off her butt to see if she will qualify. Sounds like a good opportunity, but these contract for deed deals seem like such a waste of Tim e to me and you lose the tax benefit.


Federal law say's two (2) years not 1 year and 10.5 months or 23.25 months, the federal law say's you must (MUST) owner occupy the house 2 years out of the last five! If the federal law said "Let's smoke a joint and flip a coin and see whether maybe 13 months would be ok"? It would be written into federal law that way!

The Federal Statute say’s “The home must be owner occupied 2 years (24 months or 730 days) out of the last 5 in order to qualify for the owner occupied sale tax credit of up to $250k as an individual or up to $500k as a married couple”!

5 years is 60 months, 260 weeks, 1825 days, 43,800 hours or 2,628,000 minutes! If you do not occupy it for 2 years you don’t qualify!

It goes to zero on November 12, 2016 exactly 3 years after he rented the house!


I agree about asking her to see if she qualifies for financing. It is one thing to day dream about buying your home and another altogether to do it.