Q & A with America's Real Estate Professor: Personal residence gain exclusion

Sellers can exclude up to $250,000 of the gain from the sale of the property.
Zillow
May 14, 2013

Q. I moved back into one of my rental properties four years ago – it’s been my personal residence since then - and now I plan to sell the property. Are there any issues – since it was a rental property - with using the personal residence income on sale exclusion when I sell the property? Tina N., Fargo, N.D.

A. There shouldn’t be any issues with using the personal residence exclusion since you’ve lived in the property more than two of the past five years. You can exclude up to $250,000 of the gain ($500,000 if married filing jointly) from the sale of the property.

One minor item though is that since it was a rental property, you were probably depreciating the property for tax purposes, so you need to determine what the current federal income tax basis is so that you can properly calculate that gain that you plan to exclude from taxation. The basis is generally your original purchase price, plus any capital improvements, minus any depreciation. If you’ve depreciated it for years, you might have a bigger gain than you believe on the sale – and you might still have a taxable event due to the sale, but hopefully not too much.

Of course, as with all tax issues, talk with an experienced tax professional or CPA to get proper guidance.

Purchase Contract Contingencies

Q. I’m trying to buy a property and sadly there are at least ten offers on every property I want to buy! I’m considering removing some of the typical contingencies – appraisal, financing, home inspection, HOA documents – from my offers in hopes that will increase the chances I have my offer accepted over others. Have you done this before? Jennifer C., Burke, VA

A. First, yes, it is very tough these days to buy properties with such low inventory levels and it seems like an unlimited supply of buyers! And I can understand your frustration; you are not alone.

But removing contingencies from a contract needs to be done cautiously; those contingencies are there to protect you. I have removed ones before, but I’m a relatively skilled buyer and I will only remove them when I’m sure that I have little to lose by agreeing to remove them. For example, I bought a property in a community where I already owned a property, so I already had the HOA documents. Therefore, I removed that contingency from my contract because there was no risk to me on this issue.

I’ve also removed, very quickly, home inspection contracts when I’ve been able to do an inspection within days or going into escrow.

However, when you remove contingencies, that means your money is usually at risk, so be very careful to make sure you are comfortable with that risk before you decide to make an offer on properties without the typical contingencies included in the contract. Good luck.

EDITOR'S NOTE: This story was written by Leonard Baron, MBA, who is know as America’s Real Estate Professor® His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! Email Your Questions to: Leonard@ProfessorBaron.com