Q: We have been transferred out of the Washington area, and have purchased a new home that will be our principal residence. In today's market, it is quite difficult for us to sell our house, and we have heard that Congress recently extended the time for selling houses to take advantage of the so-called "roll-over." Can we rent our house for a year or so, and then try to sell it later, taking advantage of the deferment of the profit?
A: The answer to your question lies more in facts than in law.
If a taxpayer buys a new residence for an amount at least as great as the sales price of the old residence, the profit (gain) made on the old house is deferred for a later time. Under the old tax law, the new residence had to be purchased within a period beginning 18 months before the sale of the old house and ending 18 months after the sale.
The new tax law--the Economic Recover Tax Act of 1981--changed the time period to 24 months. This new time period applies to sales of the old house that took place after July 20, 1981. If the 18-month period under the old law had not expired as of July 20, the taxpayer is entitled to take the entire 24 months.
This is an important change in the tax laws affecting the sale of principal residences. To qualify for the deferment of taxes (the roll-over), the taxpayer must be able to show that both the old and the new houses are "principal" residences. In your case, as in thousands of cases around the country, you are having trouble selling your house because of high interest rates. Clearly, you don't want to keep the house vacant, since this will be a severe financial loss and an open invitation to vandals. Additionally, it will affect your insurance coverage.
The ideal solution, of course, is to rent the house for a year, and hope that the market will be more receptive to real estate sales next year.
The law on this subject is somewhat hazy. Only generalizations can be made.
It appears, however, that the test of whether you will be able to take advantage of the roll-over goes to your intent. If you intended to sell the house but were unable to do so, the tax cases in the courts seem to favor the taxpayer and permit the roll-over.
If your intent is merely to rent the property, and to decide later whether to sell, it is pretty clear that you would lose the tax advantage.
How do you show intent? Perhaps the best way is to put the house on the market--with or without a real estate broker. Advertise the house for sale for at least a month. Make a good-faith effort to sell. Keep copies of all your advertisements, and keep a notebook of your sales efforts. If you are ever audited by the Internal Revenue Service, these facts will be helpful to establish your intent.
If you seriously intend to sell, but are unable to do so now, it is even possible to take depreciation on the property when you have it rented. You should consult your accountant to determine the extent and amount of the depreciation that will be permitted.