Many homeowners purchased La Jolla residential real estate for investment purposes because of the large rent they can get on a weekly basis during the high season (May-September and December-January.) Because La Jolla is a beach destination, rents tend to be higher than other surrounding areas. With the change of the economy though, these investors are beginning to sell their investment properties. Other La Jolla investors have moved into their investment property, lived there for a while, and now is selling them. Be careful! Investors who live in their rental homes will be affected by a new Federal tax law when they sell.

Effective January 1, 2009 a new Federal tax law took effect which states that a homeowner will not be able to take all of the tax exclusion ($250,000 or $500,000) on the sale of the investment property if prior to you living in the property it was rental. The IRS doesn’t consider the property totally owner occupied even if you lived in the property.

Here is how it works. The IRS will take the “qualified time” (the time when it was a personal residence) and the time or “non-qualified time” (when the property was used as a second home, vacation rental or rental) and they calculate what your “tax free exclusion” would be calculating the number of months for both. The investor who lived in the property after using it as a rental could stand to substantially reduce their tax benefits.

La Jolla currently has 315 homes condos and townhouses on the rental market today with the average rent of $4187 monthly. Many of the rentals are on a weekly basis with the average rent of $6800 per week. Investors should become educated on all of the tax laws prior to selling any investment property. This is not tax advice and investors should see their accountant for more information.

Kiplinger Tax Letter