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We're converting a rental to
our primary residence
Dear Dollar Diva,
We have rented our condo for the past 10 years and have been depreciating
it on our taxes. We expect to be moving into it and making it our
primary residence. What do we do about the depreciation we've deducted
in the past? Is there anything we should be doing before we move
in that would make the tax transition easier?
You don't have a taxable event until you sell the
condo. Take care of any repairs and maintenance issues before your
tenants move out. Fixing leaks and having the carpets cleaned are
deductible expenses as a landlord, but not as a homeowner.
Of course, you can't depreciate the property when
it's your primary residence, unless you use a portion as a home
office. See the Diva's "Can
I write off my home office?" if you plan to do that.
Will I be able to exclude the gain from the sale of
the condo when I sell?
Even though you used the condo as a rental for a period
of time, you should be able to exclude most of the gain if you live
in it for the next two years. In order to exclude the gain on a
principal residence, a taxpayer has to meet the following ownership
and use tests:
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Ownership test: You or your spouse has to have
owned the residence for at least two years during the five-year
period prior to the sale.
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Use test: You have to have used it as a principal
residence for at least two years during the five-year period
prior to the sale. If it's a joint return, both spouses have
to have used it as their primary residence. If only one passes
the test, only half the gain is excluded.
What about the depreciation we already took?
| The original cost of your
condo, plus expenditures the IRS allows you to add (such as
property improvements) minus items (such as depreciation) that
the IRS makes you deduct. If the home was a gift or an inheritance,
different rules apply. See IRS
Publication 523, Selling your home. |
Depreciation deducted up to May 6, 1997 will reduce
the basis of your condo. Depreciation deducted after May 6, 1997
gets reported and taxed as capital gains.
The IRS has put together worksheets to help the homeowner
figure out his capital gains, and capital gains exclusion when he
sells his home. You'll find the worksheets you need in IRS
Publication 523, Selling your home.
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DOROTHY ROSEN has a master's degree in finance, with a specialization in accounting,
from the Kellogg Graduate School at Northwestern University in Evanston,
Ill. Rosen has more than 15 years of experience in the financial arena, serving
in Illinois and Florida as a certified public accountant, financial consultant,
expert witness and educator. She is owner of Dorothy Rosen, CPA, a public
accounting firm that serves individuals and small businesses.
