ASK KIM
Selling a House You No Longer Live In
by Kimberly Lankford

In 2003 I converted my home into a rental. If I move back in and then sell the house, will I be able to avoid capital gains?

Before you start packing the U-Haul, listen up. You may not need to move back into the house to claim the capital gains exemption.

To qualify for tax-free profit on a home sale (up to $250,000 if you're single, $500,000 if you're married and file a joint return), you must own and live in the house for at least two of the five years leading up to the sale. So if you've rented the house for less than three years, you still qualify.

If it's been more than three years since you've lived in the house, you must move back in. However, you need to stay only long enough to fulfill the 24-month requirement. That is, living in the house both before and after the rental will count toward the two years you need.

This assumes, however, that you did not buy and sell another place while you were renting out your erstwhile home.

You must wait at least two years after you sell a house (and claim tax-free profit) before you can do it again.

Also be aware that not all of your gain from a reconverted rental can be tax-free. Profit attributable to depreciation while you rent out the house (depreciation cuts your basis and therefore increases profit dollar for dollar when you sell) will be taxed at a flat 25%.

For more information about the tax rules for selling your home, see IRS Publication 523 Selling Your Home.