I own a house that I have lived in for the past 17 years. I want to stay here and then sell it when the market goes back up in about 2 years. Meanwhile, I want to buy the new house this month, rent it for 2 years, then once mine is sold, move into the new one. Can I still take full advantage of the capital gains exemption say ten years from now on the new house?

ANSWER

The BIDaWIZ Team's Answer:

The short answer is that based on today's tax laws, you can likely still claim a portion of the capital gains exclusion on the new home you purchase. However, as soon as you decided to rent the home, you've effectively converted it to rental property for tax purposes. Still, when you eventually sell it you may be able to utilize IRC Section 121 to claim a portion of the capital gains exclusion when you sell the property. Please note that any depreciation taken while the property is a rental will not qualify for the capital gains exclusion, and will instead be subject to depreciation recapture. In addition, the amount of the capital gains exclusion is generally allocated on a pro-rata basis in accordance with how long the property was considered qualified versus non-qualified. Renting the property is considered non-qualified use.