New Tax law will effect thousands of Hawaii rental property owners

There is much discussion about a change to the tax code that will effect owners of rental property everywhere.

Obligatory Disclaimer - I am not a CPA or tax advisor, please speak to a licensed tax advisor with all tax issues.

The new law effective this year will apparently take away a rental property owner's ability to move into a rental home or condo and then live in it for 2 years to avoid all capital gains tax. Until this year, this method of avoiding taxes was a huge benefit to rental owners.

They would use a 1031 exchange to sell a rental and buy a new property that planned to live in someday. The property would remain a rental for two years or more before the owner would then move in. Then since they lived in the house for more than 2 years, they could sell it basically tax free, at least avoiding tax on the first $250k per person, $500k for married couples.

Well the new tax sounds like it's going to prorate the amount of tax you can avoid. So even if you live in the house for 2 years, if it was a rental for 2 years before that, you can only avoid half the tax. I'm not exactly clear on all the details, but this is what I know so far.

Bottom line for rental property owners is that if they are planning to sell a property that was formerly a rental, this is probably the year to do it to avoid some taxes. Also when buying a rental in the future, you have to keep this in mind, because it will be more difficult to avoid taxes even if you live in it.

I'm not sure if this will effect the rental market in Hawaii at all, since many people just keep exchanging properties until they are ready to finally buy the one they want to retire in and then never sell that one. It still works fine as long as you don't sell the property outright in the end. At least this is my understanding.