Arizona Real Estate Law

by Christopher A. Combs

The following is for informational purposes only and is not intended as definitive legal or tax advice. You should not act upon this information without seeking independent legal counsel. If you desire legal, tax or other professional advice, please contact your attorney, tax advisor or other professional consultant.

Partial Residency Required for Capital Gains Tax Exemption

Question: Five years ago I purchased a condominium in Scottsdale. I lived in this condominium for the first four years, and then rented the condominium for one year to a tenant under a lease/option to purchase. The tenant has now purchased the condominium, and I have a $140,000 capital gain. Do I have to pay capital gains taxes on this $140,000 because the condominium was not my personal residence at the time of sale?

Answer: No. In order for you to take advantage of the capital gains tax exemption of $250,000 for a single taxpayer ($500,000 for married taxpayers), the condominium does not need to be your personal residence at the time of sale. The condominium need only have been your personal residence for two of the five years preceding the sale of the condominium. Therefore, you should not have to pay capital gains taxes on your $140,000 capital gain. You will be liable, however, for the 25% tax for recapture of any depreciation during the year that the home was rented.

Phoenix attorney Christopher A. Combs is a partner with the firm of Combs Law Group, P.C. Reprinted with permission. Copyright 2006, all rights reserved.

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