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Question for the Money Doctors

Question submitted on May 6, 2013.

Question

Hi, we own two homes: one that we're living in and the other that we used to live in, which we rent out currently. We're thinking if it's more money saving to sell it within three years after we moved out of the old house, than keeping it for a longer period to help our kids go to college. This old house's rental basis (the market value as of the day we moved out) is about $220k. Our cost basis (?) which includes both the purchase price and improvements is $340k. Currently it's about $300k.

Answer

The answer to your question will become more apparent as you work through an after-tax cash flow analysis. In other words, compare the annual cash flow from selling the property and investing the after- tax proceeds to the annual cash flow from maintaining the old home as a rental property.

You are apparently aware that the basis for depreciation purposes was reduced to the lower fair market value of $220,000 at the time the home was converted to rental. On the sale, the rules are a bit tricky depending on whether you have a gain or a loss. Since your net sales price falls between your basis for a tax loss ($220,000 less accumulated depreciation) and your basis for a tax gain ($340,000 less accumulated depreciation), there is neither a taxable gain nor a taxable loss on the sale.

Please contact a CPA/PFS in your region (visit www.findacpapfs.com) to help you with the above Federal reporting along with reviewing the State tax impact, which may not follow the Federal tax rules. I hope that this helps.


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