Please bear with me through this rather rambling post. I tend to think outside of the box which is often not the traditional way of doing things and can make it difficult to figure out the ramifications of what we are considering doing. Would appreciate feedback on what those may be from a capital gains tax exclusion POV.
We have a considerable amount of capital gains on our primary residence. We are looking to relocate, though we don’t know where to at this point and expect to be traveling extensively to get first hand experience in some areas we are considering.
We cannot sell the house for at least another year, having claimed capital gains exclusion on the sale of a house last year. One can only claim capital gains exclusion every two years. We had lived in that house for two years and then rented it out for the following almost 3, at which point it was sold. Was a nice surprise to discover we still qualified for 100% exclusion and it was not prorated. I am obviously not a tax pro, and would prefer not to be surprised this time around, nice or not.
In considering our options for what to do with our current residence, I am trying to better understand the tax implications of our choices. For the rest of this year, we have a young woman moving into the downstairs apartment to housesit, while we maintain the upstairs as our primary, retreating there in between excursions. We are not charging rent and picking up utilities, paying for lawn, etc. She is simply our eyes and ears and mail forwarding, providing signs of life to the otherwise vacant home.
We are hesitant in this period of inflation to sell the property next Spring, particularly with a 2% FRM, unless we have found a place to move to. We have every expectation that the property will continue to increase in value, due to local markets. Since we are staying months at a time in our travels, it could take a few years to vet these possible future places to live, and are looking at what our next steps could be. We have considered the following:
Keeping the upstairs as our primary residence, rent out the downstairs apartment. If we sell within 3 years we should still have the full $500K exclusion available to us. If it takes longer than 3 years to sell, we would lose part of the exclusion? What if we only rent the lower unit for 3 years and then take it off the market and remain here as a primary?
Rent out both units for up to 3 years. We would still have lived there 2/5 years. If the property needed to be fixed up at the end of the leases, I assume the time needed to bring the property back up to prime would count against our rental time and need to be done within the 3 year timeframe from move out to sale.
Rent lower unit as a long term rental and our upstairs unit as a 30 day plus furnished rental, possibly staying here in between travel. Or not.
I do realize that there are more tax implications here than just capital gains exclusion, but that is the area of taxation I am concerned with in this post. If you wish to post on loss of other tax benefits fbo other readers, please go ahead, but I would appreciate the thread staying on the capital gains tax exclusion topic.