Investment/Debt Related Questions

[Thunder Good-Oil]

Does that rule apply if I have been renting it out for the past 2.5 years and claiming that on my taxes (sorry, left that part out)?

I’m not sure what rules apply if a primary home is rented. It would get complicated with depreciation and operating expenses.

In an unrelated matter, stock equities have been pulling back significantly for a couple of weeks. Converting to Roth IRAs is something to consider right now. Of course if more deterioration is looming, waiting works better. A similar strategy to dollar cost averaging when buying investments is a sound strategy to convert to Roths as well. Instead of converting all at once, spread it out and possibly catch lower share prices with portions of the IRA.

 

[BigOrangeMojo]

I’m not sure what rules apply if a primary home is rented. It would get complicated with depreciation and operating expenses.

In an unrelated matter, stock equities have been pulling back significantly for a couple of weeks. Converting to Roth IRAs is something to consider right now. Of course if more deterioration is looming, waiting works better. A similar strategy to dollar cost averaging when buying investments is a sound strategy to convert to Roths as well. Instead of converting all at once, spread it out and possibly catch lower share prices with portions of the IRA.

Assuming the 2/5 test is met (and otherwise qualifies)...

You'd have to reduce basis by any depreciation claimed as an expense for purposes of 250/500K exclusion...

 

[GoDucks349]

Yeah, we moved to nashville in 2011 and bought a home for $225,000. In 2024 it is worth about $600,000 so it's something to consider.
But we are both in our 70s. I have landscaped for years, and those Japanese Maples grow vey slowly here. I'd like to see them in a few more years.
Dear wife has made this home her nest. Granite in the kitchen, wood floors in every room except laundry and bathrooms, etc.
We ae in a nice neighborhood, and our home is just right for us.
So we are here until at least one of us goes. Then it'll be $250K.
Meh, it might be our children's problem.

In TN most people use a realtor when they sell a home. That commision has typically been 6% of the Sales price,
i.e. $600,000 x 6%= $36,000.
That % might become less, but having to sell a home to avoid income tax becomes just a trade off.
FWIW, we have lived in 13 homes. Maried 43+ years.

You sound similar to my wife and me, we're in our 70s, we down sided about 3 years ago to a very nice two year old 2000 sq ft one level. Complete with hardwoods in the den, living, dinning, kitchen and hallways, granite countertops, all nice finishing touches. We did spend a chunk on new furniture (Pottery Barn loves us) and landscaping. We've been married 47 years next month. We've lived in 8 different places. We've lived in Eugene, Portland and a very small town in the mountains. At our current house we've planted 4 different Japanese maples since moving in. Love them.

I do understand moving at this age can be a challenge, I just don't have the energy I use to have. Still I think if a place popped up that was just a little larger on a little larger lot we might consider making the move for the right neighborhood.

If I told you Chip Kelly's old place is 2 1/2 blocks from our current home and Dan Lanning's place is about 6 blocks away, it's not an inexpensive neighborhood.

 

[Go aeiou]

You sound similar to my wife and me, we're in our 70s, we down sided about 3 years ago to a very nice two year old 2000 sq ft one level. Complete with hardwoods in the den, living, dinning, kitchen and hallways, granite countertops, all nice finishing touches. We did spend a chunk on new furniture (Pottery Barn loves us) and landscaping. We've been married 47 years next month. We've lived in 8 different places. We've lived in Eugene, Portland and a very small town in the mountains. At our current house we've planted 4 different Japanese maples since moving in. Love them.

I do understand moving at this age can be a challenge, I just don't have the energy I use to have. Still I think if a place popped up that was just a little larger on a little larger lot we might consider making the move for the right neighborhood.

If I told you Chip Kelly's old place is 2 1/2 blocks from our current home and Dan Lanning's place is about 6 blocks away, it's not an inexpensive neighborhood.

My wife says "The next move is either the nursing home or the funeral home".

 

[distrovol]

Assuming the 2/5 test is met (and otherwise qualifies)...

You'd have to reduce basis by any depreciation claimed as an expense for purposes of 250/500K exclusion...

When you say "basis" are you referring to the original purchase price 20 years ago or whatever I would sell it for in the near future?

 

[BigOrangeMojo]

When you say "basis" are you referring to the original purchase price 20 years ago or whatever I would sell it for in the near future?

Basis is purchase price plus closing costs plus improvements less depreciation claimed as an expense on your 1040. See more detail below.

Basis Adjustments—Details and Exceptions​

You should include many, but not all, costs associated with the purchase and maintenance of your home in the basis of your home. For more information on determining basis, see Pub. 551, Basis of Assets.

Fees and Closing Costs​

Some settlement fees and closing costs you can include in your basis are:

• Abstract fees (abstract of title fees),
• Charges for installing utility services,
• Legal fees (including fees for the title search and preparing the sales contract and deed),
• Recording fees,
• Survey fees,
• Transfer or stamp taxes, and
• Owner's title insurance.

Settlement costs don’t include amounts placed in escrow for the future payment of items such as taxes and insurance.
Some settlement fees and closing costs you can’t include in your basis are:

• Fire and casualty insurance premiums,

• Rent for occupancy of the house before closing,

• Charges for utilities or other services related to occupancy of the house before closing,

• Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994),

• Charges connected with getting a mortgage loan, such as:
  1. Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs),
  2. Loan assumption fees,
  3. Cost of a credit report,
  4. Fee for an appraisal required by a lender,
  5. Points (discount points, loan origination fees), and
• Fees for refinancing a mortgage.

Construction.

If you contracted to have your house built on the land you own, your basis is:

• The cost of the land, plus
• The amount it cost you to complete the house, including:
  1. The cost of labor and materials,
  2. Any amounts paid to a contractor,
  3. Any architect's fees,
  4. Building permit charges,
  5. Utility meter and connection charges, and
  6. Legal fees directly connected with building the house.

Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. It also includes certain settlement or closing costs. In addition, you must generally reduce your basis by points the seller paid you.
If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Don’t include in the cost of the house:

• The value of your own labor, or
• The value of any other labor for which you didn’t pay.

Costs owed by the seller that you paid.

You can include in your basis any amounts the seller owes that you agree to pay (as long as the seller doesn’t reimburse you), such as:

• Any real estate taxes owed up through the day before the sale date,
• Back interest owed by the seller,
• The seller's title recording or mortgage fees,
• Charges for improvements or repairs that are the seller's responsibility (for example, lead paint removal), and
• Sales commissions (for example, payment to the seller's real estate agent).

Improvements​

Improvements add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and improvements to the basis of your property.
The following chart lists some examples of improvements.

Examples of Improvements That Increase Basis​

Additions Bedroom Bathroom Deck Garage Porch Patio Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Swimming pool	Systems Heating system Central air conditioning Furnace Duct work Central humidifier Central vacuum Air/water filtration systems Wiring Security system Lawn sprinkler system
Exterior Storm windows/doors New roof New siding Satellite dish Insulation Attic Walls Floors Pipes and duct work	Plumbing Septic system Water heater Soft water system Filtration system Interior Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting Fireplace

Repairs done as part of larger project.

You can include repair-type work if it is done as part of an extensive remodeling or restoration job. For example, replacing broken windowpanes is a repair, but replacing the same window as part of a project of replacing all the windows in your home counts as an improvement.
Examples of improvements you CAN’T include in your basis.

You can’t include:

• Any costs of repairs or maintenance that are necessary to keep your home in good condition but don’t add to its value or prolong its life. Examples include painting (interior or exterior), fixing leaks, filling holes or cracks, or replacing broken hardware.
• Any costs of any improvements that are no longer part of your home (for example, wall-to-wall carpeting that you installed but later replaced).
• Any costs of any improvements with a life expectancy, when installed, of less than 1 year.

Exception.

The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition. However, you must adjust your basis by any amount of insurance reimbursement you receive or expect to receive for casualty losses. See Worksheet 2, line 5.

 

[McDad]

Basis is purchase price plus closing costs plus improvements less depreciation claimed as an expense on your 1040. See more detail below.

Basis Adjustments—Details and Exceptions​

You should include many, but not all, costs associated with the purchase and maintenance of your home in the basis of your home. For more information on determining basis, see Pub. 551, Basis of Assets.

Fees and Closing Costs​

Some settlement fees and closing costs you can include in your basis are:

• Abstract fees (abstract of title fees),
• Charges for installing utility services,
• Legal fees (including fees for the title search and preparing the sales contract and deed),
• Recording fees,
• Survey fees,
• Transfer or stamp taxes, and
• Owner's title insurance.

Settlement costs don’t include amounts placed in escrow for the future payment of items such as taxes and insurance.
Some settlement fees and closing costs you can’t include in your basis are:

• Fire and casualty insurance premiums,
• Rent for occupancy of the house before closing,
• Charges for utilities or other services related to occupancy of the house before closing,
• Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994),
• Charges connected with getting a mortgage loan, such as:
  
  1. Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs),
  2. Loan assumption fees,
  3. Cost of a credit report,
  4. Fee for an appraisal required by a lender,
  5. Points (discount points, loan origination fees), and
• Fees for refinancing a mortgage.

Construction.

If you contracted to have your house built on the land you own, your basis is:

• The cost of the land, plus
• The amount it cost you to complete the house, including:
  
  1. The cost of labor and materials,
  2. Any amounts paid to a contractor,
  3. Any architect's fees,
  4. Building permit charges,
  5. Utility meter and connection charges, and
  6. Legal fees directly connected with building the house.

Your cost includes your down payment and any debt such as a first or second mortgage or notes you gave the seller or builder. It also includes certain settlement or closing costs. In addition, you must generally reduce your basis by points the seller paid you.
If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Don’t include in the cost of the house:

• The value of your own labor, or
• The value of any other labor for which you didn’t pay.

Costs owed by the seller that you paid.

You can include in your basis any amounts the seller owes that you agree to pay (as long as the seller doesn’t reimburse you), such as:

• Any real estate taxes owed up through the day before the sale date,
• Back interest owed by the seller,
• The seller's title recording or mortgage fees,
• Charges for improvements or repairs that are the seller's responsibility (for example, lead paint removal), and
• Sales commissions (for example, payment to the seller's real estate agent).

Improvements​

Improvements add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of additions and improvements to the basis of your property.
The following chart lists some examples of improvements.

Examples of Improvements That Increase Basis​

Additions Bedroom Bathroom Deck Garage Porch Patio Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Swimming pool	Systems Heating system Central air conditioning Furnace Duct work Central humidifier Central vacuum Air/water filtration systems Wiring Security system Lawn sprinkler system
Exterior Storm windows/doors New roof New siding Satellite dish Insulation Attic Walls Floors Pipes and duct work	Plumbing Septic system Water heater Soft water system Filtration system Interior Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting Fireplace

Repairs done as part of larger project.

You can include repair-type work if it is done as part of an extensive remodeling or restoration job. For example, replacing broken windowpanes is a repair, but replacing the same window as part of a project of replacing all the windows in your home counts as an improvement.
Examples of improvements you CAN’T include in your basis.

You can’t include:

• Any costs of repairs or maintenance that are necessary to keep your home in good condition but don’t add to its value or prolong its life. Examples include painting (interior or exterior), fixing leaks, filling holes or cracks, or replacing broken hardware.
• Any costs of any improvements that are no longer part of your home (for example, wall-to-wall carpeting that you installed but later replaced).
• Any costs of any improvements with a life expectancy, when installed, of less than 1 year.

Exception.

The entire job is considered an improvement if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. For example, if you have a casualty and your home is damaged, increase your basis by the amount you spend on repairs that restore the property to its pre-casualty condition. However, you must adjust your basis by any amount of insurance reimbursement you receive or expect to receive for casualty losses. See Worksheet 2, line 5.

Your details are in dark mode or something in your post but show up great in the reply im typing now.

Weird.

ETa: actually didn't show up that great after all.

 

[distrovol]

Same here, @McDad . I had to go to light mode to see it.

@BigOrangeMojo- That's great info, thanks so much. So it appears the starting point for basis is what I originally paid for it 20 years ago, correct?

 

[BigOrangeMojo]

Basis would be purchase price, some closing costs plus improvements. If you've held for a while, the improvements could be significant....

 

[distrovol]

Basis would be purchase price, some closing costs plus improvements. If you've held for a while, the improvements could be significant....

They are significant. I did $20k in remodeling when I moved out to get it rent ready.

Just so I understand how this affects a future tax liability I'd appreciate it if you can indulge me one last time (numbers are not actual just throwing some out):

- purchased 20 years ago 130k
- over the years 20k improvements
- get rent ready another 20k
- depreciated for rental for 2 tax filing cycles
- sell for 300k

Tax liability= ??
Profit: ??

 

[BigOrangeMojo]

They are significant. I did $20k in remodeling when I moved out to get it rent ready.

Just so I understand how this affects a future tax liability I'd appreciate it if you can indulge me one last time (numbers are not actual just throwing some out):

- purchased 20 years ago 130k
- over the years 20k improvements
- get rent ready another 20k
- depreciated for rental for 2 tax filing cycles
- sell for 300k

Tax liability= ??
Profit: ??

What exactly are your "get rent ready" Expenses? Did you deduct those already?

How much is your depreciation?

Have you lived in house for 2/5 years?

 

[distrovol]

What exactly are your "get rent ready" Expenses? Did you deduct those already?

How much is your depreciation?

Have you lived in house for 2/5 years?

- 20k and yes I deducted them (kinda had to as that was the covid year where the .gov mailed out the child tax credit checks. Would've owed a lot had I not.

- 10k depreciation

- yes

 

[distrovol]

@BigOrangeMojo Following up in case you missed my answers to your questions (see above)