Author Topic: Establishing primary residency in fully occupied rental?  (Read 1897 times)

Left Bank

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Establishing primary residency in fully occupied rental?
« on: September 15, 2017, 04:37:11 PM »
My wife and I are thinking about some long-term, van-life travel next year and will probably rent out our primary residence here in Oregon when we do.  We have been here for over two years.  We also have a fully rented, three-family house on the east coast that, ideally, we would like to make our primary while we traveled to start building up time toward the 2 of 5yr rule for if we sell to avoid the tax consequence.  Can someone help me with this?  Can I "move into" a fully rented house?  Can I use some sort of mail service to take care of my mail while traveling and still use that rental address as my legal address?  Any advice appreciated.
Thanks,
FR

ElleFiji

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Re: Establishing primary residency in fully occupied rental?
« Reply #1 on: September 15, 2017, 06:22:43 PM »
...um, I'm not American or a money expert, but this reads like one of those "how do I commit fraud?" Posts. Maybe just poorly written and you are not aiming to commit fraud?

CareCPA

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Re: Establishing primary residency in fully occupied rental?
« Reply #2 on: September 15, 2017, 07:52:55 PM »
My wife and I are thinking about some long-term, van-life travel next year and will probably rent out our primary residence here in Oregon when we do.  We have been here for over two years.  We also have a fully rented, three-family house on the east coast that, ideally, we would like to make our primary while we traveled to start building up time toward the 2 of 5yr rule for if we sell to avoid the tax consequence I think you may be misinterpreting the rules for the 2/5 exception. Moving back into a rental doesn't magically make all the gains tax-free..  Can someone help me with this?  Can I "move into" a fully rented house This would be a stretch. Ultimately, it's up to you and whoever does your tax returns (which may also be you for all I know)?  Can I use some sort of mail service to take care of my mail while traveling and still use that rental address as my legal address?  Any advice appreciated.
Thanks,
FR

Left Bank

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Re: Establishing primary residency in fully occupied rental?
« Reply #3 on: September 16, 2017, 10:07:11 AM »
CareCPA, thanks for the reply and the offer to help.  I'd prefer we not PM as I think this would be useful information for the community. 
It is my understanding that you are exempt up to 500k on your primary address as long as it is your primary for at least 2 of the last 5 years.  Since we will not be physically in either for a period of time while traveling, why not make the other my primary to start working toward that two years?   I do not want to do anything illegal.  I just want to fully use the law to our advantage and not make unnecessary donations to the government.
If I am wrong in my understanding, please correct me.  I am someone who isn't afraid of learning something by asking "dumb" questions.
FR

Mr. Green

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Re: Establishing primary residency in fully occupied rental?
« Reply #4 on: September 16, 2017, 11:25:00 AM »
The IRS rules for taking the exclusion are here:

https://www.irs.gov/publications/p523/ar02.html#en_US_2016_publink100025053

I personally think you are pushing the envelope a bit if you try to claim this as your primary residence when you have it rented out -- and since you presumably have to declare the rental income on your taxes, I don't see how you can keep this hidden from the IRS.
A driver's license requires your home address. How does this work if you don't have one?

maizefolk

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Re: Establishing primary residency in fully occupied rental?
« Reply #5 on: September 16, 2017, 11:38:45 AM »
IANAL & IANAA, but from what I know it would be helpful to make the analogy to the situation of a duplex where you live in half and have a tenant living in the other half. If the two sides are equal, you can depreciate 1/2 of the unit each year (the side functioning as a rental) but not the side you live in. When you sell the duplex, you'd owe capital gains and depreciation recapture on the 1/2 you rented out, but not the 1/2 you lived in (as long as the capital gains on that half were under $250,000).

But the key thing here is that this 50/50 split depends on the two sides of the duplex being equal in size and amenities. If you have a duplex where one side is twice the side of the other, it'd be a 67/33 split and so one.

Let's say you found some unused closet that you could partition out from one of your rentals and call your primary residence while you were van dwelling. First of all that may be fraud I don't know (IANAL & IANAA remember) but even if it wasn't, it would only let you shelter gains on the proportion of the total rental property which was part of the unused closet. So if, for example the closet was 50 sq ft of a 2,000 sq ft rental the most you could hope to shelter from capital gains would be 2.5%, potentially less. And this would mean reducing the amount you could depreciate each year for tax purposes.

Left Bank

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Re: Establishing primary residency in fully occupied rental?
« Reply #6 on: September 16, 2017, 01:01:20 PM »
IANAL & IANAA, but from what I know it would be helpful to make the analogy to the situation of a duplex where you live in half and have a tenant living in the other half. If the two sides are equal, you can depreciate 1/2 of the unit each year (the side functioning as a rental) but not the side you live in. When you sell the duplex, you'd owe capital gains and depreciation recapture on the 1/2 you rented out, but not the 1/2 you lived in (as long as the capital gains on that half were under $250,000).

But the key thing here is that this 50/50 split depends on the two sides of the duplex being equal in size and amenities. If you have a duplex where one side is twice the side of the other, it'd be a 67/33 split and so one

Let's say you found some unused closet that you could partition out from one of your rentals and call your primary residence while you were van dwelling. First of all that may be fraud I don't know (IANAL & IANAA remember) but even if it wasn't, it would only let you shelter gains on the proportion of the total rental property which was part of the unused closet. So if, for example the closet was 50 sq ft of a 2,000 sq ft rental the most you could hope to shelter from capital gains would be 2.5%, potentially less. And this would mean reducing the amount you could depreciate each year for tax purposes.

Maizeman, thank you.  THAT makes sense.  Akin to what you can take for the home office deduction.

CareCPA

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Re: Establishing primary residency in fully occupied rental?
« Reply #7 on: September 16, 2017, 06:44:47 PM »
CareCPA, thanks for the reply and the offer to help.  I'd prefer we not PM as I think this would be useful information for the community. 
It is my understanding that you are exempt up to 500k on your primary address as long as it is your primary for at least 2 of the last 5 years.  Since we will not be physically in either for a period of time while traveling, why not make the other my primary to start working toward that two years?   I do not want to do anything illegal.  I just want to fully use the law to our advantage and not make unnecessary donations to the government.
If I am wrong in my understanding, please correct me.  I am someone who isn't afraid of learning something by asking "dumb" questions.
FR
FYI, that's just my forum signature. My preference is giving advice on the forum.

Goldielocks

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Re: Establishing primary residency in fully occupied rental?
« Reply #8 on: September 16, 2017, 11:46:54 PM »
To reclaim as your primary residence, your tenants need to become room mates, without exclusive use to the property (or a secondary suite).   It seems to me that your largest issue is to change the rental contract.

So, I guess you may need to talk to them, and get them to agree to go into a new contract as room mates voluntarily.  Alternatively, you can give them the eviction notice and offer to keep them on as roommates.   The fact that your bedroom is actually a sofa in the basement, that you rarely use, may be secondary.   They are responsible for collecting and forwarding mail when you are away.

Now, for US residency rules, and taxation, etc., you actually need to be present in the USA (and state) for X number of days per year to be taxed in that jurisdiction as a resident... and I can't see how you claim primary residence for a location that you occupy less than xX? days per year....?  Maybe there is a loophole  Canada relies more on the fact that you are a resident AND you can only claim one place at a time as primary, so maybe the US is the same.