Planning to rent out your home? There’s a tax rule change

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

Do you plan to rent out your primary residence for the next few years rather than selling? There’s a tweak in Internal Revenue Code 121, which allowed principal-residence sellers to qualify for up to $250,000 in tax-free capital gains (up to $500,000 for a qualified married couple) if they owned and occupied their primary home at least 24 of the last 60 months before its sale.

Under the old rule, rental properties could be converted to primary homes and primary residences to rentals -- if the time of occupancy requirements were met -- and you could still take a big chunk of any gains tax-free.

In 2009 that rental portion is no longer eligible for the break.

For an explanation of the 2009 change, L.A. Land checked in with Alayna Schroeder, an attorney, author of ‘Nolo’s Essential Guide to Buying Your First Home’ and an editor at Berkeley-based Nolo, who advised consumers to ‘be careful if your plan is to hold on to your home and rent it out -- not an uncommon strategy for many homeowners today who need to move but aren’t ready to sell at the low prices dominating many real estate markets. Now, the time the property is not your principal residence is considered ‘non-qualified use.’ You are only permitted to exclude gain for qualified use -- the time the property is your principal residence.’

Homeowners who rent their places out this year could be looking at receiving less (a pro-ration) of the previous exclusion -- if they are lucky enough to make a profit when they sell. So check in with your tax adviser if you’re one of them.

Even though home values are way down, this change in the tax rule may matter to some weighing the ‘rent it out or sell it’ question.

-- Lauren Beale

Thoughts? Comments?