Dear Liz: My husband and I have owned a rental property for 20 years. We’ve never lived in it. Now, we want to get out of the landlord business. We know we’ll have to recapture depreciation, but we always thought we could live in the property for a couple of years to save some on the capital gains taxes. Our accountant has told us that this is no longer true and we cannot save much by living in our rental. Federal and state taxes will take most of our profit. Is this true?
Answer: Congress dramatically shrank the loophole that once allowed people to reduce or eliminate capital gains on rental and vacation properties.
When selling a primary residence, homeowners can shelter up to $250,000 of home sale proceeds, or $500,000 for married couples, from capital gains tax if they’ve owned and lived in the home at least two of the previous five years. Those rules were established in the Taxpayer Relief Act of 1997.
Before the Housing Assistance Tax Act of 2008, landlords could move into their rentals for a couple of years, sell the properties and then invoke the home sale exclusion as if the property had been their primary residence all along.
Today most if not all of the gain on your property is considered “non-qualified use.” Only the appreciation you experienced before 2009, and after you move in, would qualify for the exemption.
The benefits of moving into a rental for a couple of years can vary greatly, depending on the specifics of your situation. Your tax pro can walk you through the math and advise you about some of your other tax-saving options, such as a 1031 exchange for another rental property or holding the real estate until death, when your heirs would benefit from a valuable step-up in basis. If you’re done with being a landlord, though, the cleanest solution might be to simply sell and pay the tax.
Dear Liz: I’m 64 and retired. My wife is 54 and still working. Half the people I talk to say take Social Security and just invest it, as you’ll make more than waiting until you get older. Others say that the tax hit isn’t worth it because my wife still works. I’ve talked to a couple financial people, and still get mixed answers. What is your opinion?
Answer: Social Security can be surprisingly complicated and many people don’t understand the nuances that should guide claiming decisions. In other words, half the people you’re talking to likely don’t know what they’re talking about.
Let’s start with a few basics, starting with the “tax hit.” If you have income other than Social Security, up to 85% of your benefit may be subject to tax. That doesn’t mean 85% of your benefit is taxed away. It means up to 85% is included in your taxable income, and subject to your tax bracket. In 2026, federal tax brackets range from 10% to 37%.
The earnings test can have a dramatic impact if you start Social Security before your full retirement age. The earnings test reduces your benefit by $1 for every $2 you earn over a certain limit ($24,480 in 2026). If you’re retired and not earning money, though, the earnings test doesn’t apply regardless of what your spouse might earn.
What starting early does do is permanently reduce your benefit. If you’re the higher earner, it also reduces the survivor benefit that one of you will get when the other dies. At that point, the smaller of a couple’s two checks goes away and the survivor has to make do with a single benefit.
If you delay, on the other hand, your benefit gets larger. After full retirement age, delayed retirement credits add 8% each year until your benefit maxes out at age 70. This guaranteed return is about twice what you’d currently get from any other low-risk investment, such as one-year Treasuries. You might earn more in the stock market, but you also could suffer losses.
Copious research shows that most people are better off delaying. You can start by reading “How Much Lifetime Social Security Benefits Are Americans Leaving On the Table?” by David Altig, Laurence J. Kotlikoff & Victor Yifan Ye for the National Bureau of Economic Research at https://www.nber.org/papers/w30675.
Liz Weston, Certified Financial Planner, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
The post Living in your rental? The tax benefits aren’t so clear cut appeared first on Los Angeles Times.
