Hamill: Renting your home without losing the IRS sale exclusion

Q: My wife and I are in our early 70s, and we will be moving to an independent living facility for seniors this summer. With the current economic uncertainty, we are interested in renting our home rather than selling. We have lived in the home for 27 years and believe it will be rented quickly and provide an income stream for us. My question is whether the rental will jeopardize our ability to later sell the house and claim the IRS $500,000 tax exclusion?

It depends on how long you rent the house. The exclusion that you mention is for the sale of a principal residence.

If you do rent the house, it will obviously not qualify as your principal residence on the date of a later sale.

That is not, by itself, a problem. The tax law requires only that the house has been your principal residence for two of the five years before sale.

The two years are shortened to one year if the absence from the home is caused by out-of-residence care required based on your condition.

You do not qualify for the shortened period since you are moving to independent living.

So, let’s say that you move in July 2025. You can rent the house for as long as three years without losing the ability to claim the exclusion.

During the rental period you will be able to claim depreciation deductions. This will reduce your taxable income during the rental period.

When the house sells, you will be required to recognize income for all prior depreciation deductions claimed.

The depreciation-induced gain applies even if you otherwise qualify for the exclusion. You are just giving back the prior tax benefit claimed.

With a 27-year ownership period, your potential gain on sale would be significant. If you rent for more than three years, you will lose the ability to claim the exclusion.

Q: Last August, you wrote a column advocating for an increase in the child care tax exclusion. You mentioned five bills that have been introduced to achieve that result. With the seeming renewal of the 2017 tax law, do you see a new tax law including a larger child care exclusion?

I do not. There does not appear to be any momentum for such a change. Obviously, I do not know for certain, but I just don’t see the support.

I advocated for greater tax benefits for child care because we face a serious workforce participation problem for women.

With an aging workforce, low birth rates and what will likely be a loss of immigrant labor, the shortage will adversely affect economic growth.

That said, what seems to be on the table is an increase in the child tax credit. That is a tax credit for parents with dependent children.

A child tax credit is certainly helpful to families. But it offsets some of the cost of raising a child without regard to the parents’ employment situation.

The pro-child credit position can be viewed as supporting an increase in birth rates. That does help the economy.

But many of the people who support a child tax credit do not support a tax exclusion for child care costs.

Those who want to encourage a more “traditional” view of the family would prefer that government policies encourage a parent to stay home with the children.

This means that an enhanced child tax credit without adding an increased child care tax exclusion supports the one-earner family.

If that is where most of Congress is at right now, then we should not expect to see a new tax law enhancing the child care exclusion.

I believe that when it comes to a preferred family structure, the toothpaste is out of the tube. If so, perhaps our laws should support the families that we now see.

Families that rely on two earners, or families headed by a single parent, would welcome enhanced tax benefits for quality child care.

Yes, they would also welcome enhanced child tax credits. And whether one or both tax benefits will be part of new legislation is up to the lawmakers.

It does not appear that there is sufficient support for any new tax legislation to enhance the tax benefits for child care.