You have options, but understand the tax issues.
Here’s a scenario: Let’s say you’re moving out of your current home. Maybe to downsize, maybe to someplace with better weather, whatever. Given that real estate seems like a pretty good inflation hedge, you might be reluctant to sell your soon-to-be former abode. Plus, according to a recent estimate, rents just hit a record high, with the national median rent up 14.1% year-over-year. Wow.
You can also write off all the standard operating expenses that go along with owning a rental property: utilities, insurance, repairs and maintenance, yard care, association fees, and so forth. Bottom line: the PAL rules can postpone rental property loss deductions, sometimes for many years. Fortunately, there are exceptions to the PAL rules that can allow you to deduct losses sooner rather than later. See the SIDEBAR below.
But…gain exclusion deal may still be available If you sell your former principal residence within three years after converting it into a rental, the federal home sale gain exclusion break will usually be available. Under that deal, you can shelter up to $250,000 of otherwise-taxable gain or up to $500,000 if you’re married. However, you cannot shelter gain attributable to depreciation, including depreciation claimed after you converted the property into a rental.
Section 1031 exchange can defer tax hit from selling The federal income tax law allows rental real estate owners to unload appreciated properties while deferring the federal income hit indefinitely. Here we are talking about Section 1031 exchanges .
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