16 Mar Selling a home after you’ve rented it out

 Q. I bought and moved into new house on April 2013. My old house, which I occupied from 1988, was rented out in June 2013. What is the best scenario for federal and state tax concerns — either to sell or keep renting?

A. The tax rules for selling a home you no longer live in are important to understand.

As you probably know, federal law allows an exclusion of gain on the sale of your principal residence of $250,000 if you are single and $500,000 if you are married, said Laurie Wolfe, a certified public accountant with Lassus Wherley in New Providence.

“Gain is the excess of what you sell the house for over what you paid for it — your basis,” she said. “To qualify for the exclusion you must meet a few tests.”

The eligibility tests for exclusion of gain on your home are as follows:

1. You must not have acquired the home through a like-kind exchange.
2. You must not be subject to the expatriate tax.
3. You must have owned the home for at least 24 months in the 5 years leading up to the sale date.
4. You must have lived in your home for at least 24 months in the 5 years leading up to the sale date.
5. You must not have excluded a gain on a different home within the prior 2 years from the sale date.

Wolfe said renting out your home after you move out of it, but before the sale, does not disqualify you from excluding gain on the sale. However, when you rent the home, you will be taking depreciation deductions as an expense of the rental.

“Upon eventual sale of the home, you will pay tax on the amount of depreciation deductions you took in the past even if the entire gain is excluded,” she said. “The rate of tax on this `depreciation recapture’ is 25 percent.”

You must also reduce the basis of the property by the amount of depreciation allowable, she said. This increases the amount of gain by the amount of depreciation taken.

“The bottom line is if your home is in a gain position and the exclusion of the gain is more beneficial than the net rental income, you should consider trying to sell the home,” Wolfe said. “If you moved out of the house in April 2013 you will want to sell it before April 2016.”

And given that you’ve purchased a new home, you should know that you can use the exclusion every two years, and the state follows the federal rules on gain exclusion and depreciation recapture.

Here’s more on selling a home in New Jersey.

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This post first appeared in March 2015.