Capital Gains Tax Property - Choose between Sale Or Rent It Out!

August 3, 2004
Tomas Harnin

Everyone requires clarifications on capital gains tax property matters sometime in life. These become very necessary when a person has an option to choose from renting out his property or selling it out. It becomes relatively difficult to choose the best option.

Those who are planning on renting out their home for just a year or two will still be eligible for these breaks (provided they've lived in their home for at least two of the past five years). Should they sell more than three years later, however, they forego the tax exemption, meaning their gain would be taxed as a capital gain on their property.

For all those whose renting plans would turn a tax-free gain into a taxable one, the general advice is to sell. It means that if there is substantial gain on the sale of property then it is better to sell it off. Because for a house on which you are never going to pay taxes if you convert the same into a rental property you attract taxes again. This does not seem wise. It is only advisable in the case if people again want to move back to the same house and live there for two years. This means that they would qualify for exemption on capital gains tax on their property.

On the other hand while rental income is taxed as ordinary income, the tax bill could easily be eliminated thanks to the numerous deductions on expenses and depreciation. There is, however, one major exception: If one eventually sells the house and qualify for the capital-gains tax exemption discussed earlier, he shall be taxed on the amount depreciated, which could make renting out home considerably less attractive.

Thus it makes more sense to sell the house than rent it out if a person does not seem to shift back to the same locale.