Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, October 31, 1994 TAG: 9410310009
SECTION: BUSINESS PAGE: A6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
If you are leaving your present home, you must determine whether it is in your best interest to sell or rent the property.
Despite conventional wisdom that results in more than 60 percent of American families owning their homes, the Virginia Society of Certified Public Accountants urges homeowners to consider the impact this will have on their tax bill and financial situation.
Many people, of course, are forced to sell.
Selling a principal residence is the best - and often the only - option for those who need the equity in their current home for a downpayment on a new one.
Homeowners who realize profits on the sale of their primary residence may qualify for a special tax break that can help to put their next home within financial reach. The tax law allows homeowners to defer taxes on their real estate gains if they purchase or construct another residence of equal or greater value within two years before, or two years after, the sale of their home.
As an example, the CPAs said, if you realize a $50,000 profit on the sale of your home which is taxable at a 28 percent tax rate, you'll be able to defer $14,000 in taxes by purchasing another home of equal or greater value within the specified time.
Older homeowners may qualify for an even greater tax break.
Generally, individuals who are age 55 or older before the date of the sale of their home, and who have occupied the residence for three out of the last five years, may exclude from their income a gain of up to $125,000 (or $62,500 for a married individual filing separately).
This tax break is especially advantageous to people who choose to trade down to a less expensive home and plan to rely on the profits from their house sale to support their retirement lifestyle or other special needs.
Renting a home temporarily, on the other hand, could have some tax ramifications unless it is done carefully.
A homeowner who puts his or her former principal residence on the market, and who then encounters difficulty in selling it, may be able to rent the home for a temporary period and still defer gain on the sale.
The homeowner, however, must demonstrate that the rental is in contemplation of the sale. Otherwise, the personal residence is deemed to have been converted to a rental property, in which case the deferral of taxes on the gain is not allowed.
For example, a homeowner relocated as a result of a job change, puts his or her residence on the market and buys a new home in another city.
After several months, the old residence doesn't sell. Preferring to have the house occupied rather than empty during the sales period, the owner then decides to rent the residence while continuing efforts to sell it.
Under conditions like these, the Internal Revenue Service typically views the owner's rental action as a temporary measure and is likely to allow the gain on the sale of the home to be deferred.
On the other hand, if the homeowner relocated and rented out the former residence without ever trying to sell it, the former residence would most likely be treated as a rental property for tax purposes.
Converting a former residence into a rental property may offer greater financial rewards for many individuals, however.
It gives owners the opportunity to generate steady rental income. Although owners cannot defer the gain on the sale of rental property, landlords are entitled to a wide range of tax deductions that can sharply reduce their tax bill.
Owners of rental property, the CPAs said, can deduct mortgage interest, property taxes and costs associated with operating and maintaining the property, such as insurance premiums, repairs and depreciation.
If there is a net loss on the rental property, this can be subtracted from the owner's gross income, generally up to $25,000. Losses that cannot be deducted in the year incurred can be carried over into future tax years.
Because special tax rules apply in the year a property is converted to a rental, the owner may want to consult with a CPA or other tax professional before making the conversion.
Finally, the CPAs recommend that you convert your former residence to a rental only if you're prepared to take on the responsibility of acting as a landlord.
And you must be certain that the conversion will not be detrimental to your financial well-being. You must be sure that the real estate market is favorable enough so that you will keep the property leased and that the market rental will provide a reasonable return on your investment.
by CNB