I have a friend who owns a condo in Florida. Owns, as in bought-it-as-an-investement-write-off. They rented it out over the last 15-20 years. They want to sell it now.
My reading of the tax laws is that they owe Fed tax that is 25% of the depreciated amount they took off their taxes on the house, which in their case is about $200K. They think that if they live in it for two years as their primary residence, they can escape taxes. Supposedly, because Florida has some strange exemption. I say that Fed Tax Law is Fed Tax Law.
Here’s a link to a Bob Bruss article which, in my mind, lays it out clearly. I’ll quote the part that I consider relavent. Bolding in the quote is mine.
And, yes, I understand that unless a qualified tax lawyer answers this, I’m just getting opinions. I have a local friend who is a professional real estate lawyer with a local firm whom I’m calling on Monday. But my curiosity has the best of me tonight.
I Am Not - well, I’m not anything, but I am a homeowner.
When did they live in the house for two years? It’s my understanding that if it’s your principal residence for two out of the last five years that you’re exempt from capital gains taxes up to a certain amount. Otherwise, it isn’t a home, it’s an investment, and you have to pay.
Their idea, before I disabused them, was to live in the condo for two years, then sell it with no tax owed, as it would be their pricipal residence for that period. But it would seem that the fact that it was purchased as a rental, written off over 20 years of depreciated value, etc. would trump their living in it and claiming the 500K joint Fed exemption for a primary residence.