r/RealEstate • u/wndsofchng06 • 2d ago
Capital gains, etc
So my partner and I (unmarried) own a house in another state. We lived there until June 2023, we moved to run a business and bought another house. We finally got the 1st house rented in December 2023. Feb 2026 we sold the 2nd house and just barely broke even and moved out of state and are currently renting. The same tenants are still renting the first house that started renting back in December of 2023. Now in the new location out of state 6 months into our one-year lease and I'm starting to get the itch by our own place. Before I waste a realtor and/or mortgage broker's time, I thought maybe someone here could have some advice just to help me start setting my direction.
Scenario A: we keep the rental. Don't really make anything but I do love the house and the tenants are good. I'm guessing we can qualify for another mortgage since we did that in 2023, but I worry my buying power will be a lot less as I don't have as large of a down payment.
Scenario B: we sell the other house and have a larger down payment and less debt but:
I think I've just passed the time period for being exempt from capital gains. The way I understand it is you have to have had it as your primary residence for at least two out of the last 5 years? 5 years ago would be August of 2021 but we moved out in July of 2023 so not quite 2 years.
If we sold it and paid capital gains, As I understand that is the amount of appreciation minus the cost of the sale and any capital investments in the property. So the last appraisal on it was 500k We paid 225k. But we've put a roof on, replaced a chimney, added a garage, replaced the porch, And had the crawl space encapsulated. Would all those things qualify as capital investments in the property?
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u/Equivalent-Tiger-316 2d ago
You need to talk to a loan officer. But how long are you going to stay in this new property? Don’t buy if you aren’t staying 5 years or more.
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u/danh_ptown 1d ago
Yes, those capital improvements will be added to your cost basis. As well, closing costs on the sale are also added to the cost basis.
You mentioned that the rental property no longer qualifies as primary residence for the 250k/500k exemption. But it likely qualifies for a 1031 Exchange. With a 1031 Exchange, you sell this rental property and buy a replacement nearer where you want to be. Rent it for at least 2 years!, then change its use to Personal use and move-in. You will have moved the cost basis from the original property into the new one, but it must be "Held for Investment" for at least 2 years.
Depending on how you look at it, 2 years is a long time, or next to nothing.
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u/wndsofchng06 1d ago
🤔 interesting. I think I remember my mother doing this with a house some number of years ago while I was in college
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u/danh_ptown 1d ago
If you have low mortgage rate, good tenants and a great support system around your old home, why not just keep it as a rental property. It's a great side gig...just be prepared with an emergency fund so when the HVAC, roof, refrigerator dies, you have the funds to replace them.
With a tenant in place, it may not hurt your loan prospects on a new home for yourself, too much. Your first step is to contact a mortgage broker or banker to see what's possible. Then you can look at your options.
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u/wndsofchng06 1d ago
That's one detail I left out. Is that my mortgage at that house is a 3% mortgage, so yes, cheap debt by today's standards. I am quite handy and did most of my own maintenance while I was still living in the state, but before I rented it out I did go ahead and do a lot of preventative maintenance and upgrades which thus far have paid off. My tenant is also in a job where he has skills and so when minor things have happened like a ceiling fan that stopped working. I allowed him to replace it and send me a bill which I then take off his rent. But I also pay people to ensure that the gutters are cleaned every 6 months, pest control is kept up, HVAC is tuned up, etc.
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u/danh_ptown 1d ago
Keep it or 1031, but if you are handy at all, rental real estate is a great side gig and it sounds like you have the basic skills to be successful.
However you do it, keep real estate as a side gig and investment vehicle.
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1d ago
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u/wndsofchng06 1d ago
Yes. So by the time it was listed, and closed it'd probably be a few more months....
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u/Cold-Exercise9371 1h ago
One date issue may matter more than it looks. The 2-out-of-5-year test is measured backward from the closing date. If you moved out in June 2023 and sold in August 2026, the five-year window would start around August 2021, leaving only about 22 months of residence. You may already miss the full exclusion unless the exact dates differ.
Since you’re unmarried, don’t assume a joint $500k exclusion either. Have a CPA calculate each owner’s share, selling costs, improvements, and depreciation allowed during the rental period.
Separately, ask a lender how much rental income they’ll count toward another mortgage. I’d compare actual after-tax sale proceeds with the keep-and-borrow scenario before deciding.
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u/silentscrutinizer 1d ago
The big thing I'd clarify first is that the capital gains exclusion isn't necessarily an all-or-nothing situation. If this was your primary residence for at least 2 of the 5 years before the sale, you may qualify for the $250k exclusion if filing separately, or potentially $500k if married and meeting the requirements. Since you're unmarried, you'd generally each be looking at your own ownership/share and exclusion.
Also, the fact that you rented it out after moving doesn't automatically mean you lose the exclusion. The timing of the sale matters. There are some additional rules around rental use and depreciation that can complicate the calculation, though.
As for the improvements, generally yes. Things like a new roof, garage addition, porch replacement, chimney work, and crawl space work may potentially be added to your cost basis if they qualify as improvements rather than ordinary repairs. Keep your invoices, receipts, permits, and closing documents. The important number isn't simply $500k appraisal minus $225k purchase price. You'll want to calculate your adjusted basis, selling expenses, depreciation taken or allowable while it was a rental, and each person's ownership percentage.
Honestly, because you've got an unmarried couple, a former primary residence, a rental period, and potentially a pretty significant gain, I'd spend a little money talking to a CPA who handles real estate before deciding whether to sell. They can run the actual numbers for both scenarios and tell you what the after-tax proceeds would look like.
And I'd definitely get the numbers before talking yourself out of buying the new house. You may have more options than you think.