If Moving, Tax Break Doesn't
Require Prompt Home Sale

With retirement nearing for myself and my husband, we are planning to move to northern Arizona in the next year. We have a home in Orange County, Calif., that we bought in 1973. We realize that this would be a good time to buy -- but not such a good time to sell our current home. If we choose to keep our present home and rent it, we would give up the tax exclusion on $500,000 of the gain. Can you tell us the pros and cons of such a decision?

Even if you don't sell your house in Southern California right away, you won't necessarily have to give up your potential tax break.

"The rule is that a married couple can get a $500,000 tax exclusion [on the sale of their primary residence] as long as they have lived in the house for two of the previous five years," says Nancy Flint-Budde, a certified financial planner in Salem, N.Y.

That window gives you a little wiggle room. You could go to northern Arizona, "try it out, and see if you really like the place" before making any big housing decisions, Ms. Flint-Budde says. "My advice to a client who's relocating in retirement is to always try it out rather than committing to a purchase in the new place right away. What if they get there and they find out they don't like it?"

Then there's your other decision: to rent or not to rent. Learning to deal with the travails of being a landlord can be tough -- especially when you're doing it from afar. Ms. Flint-Budde recommends getting help from a professional property manager.

"We're not just talking about maintaining the house," she says. "We're talking about those calls in the middle of the night because the tenants have problems. We're talking about tenants who become problems."

If you do convert your house to rental property and "take any tax benefits such as depreciation," those could affect the exclusion amount if you sell the home, says Jim Weil, a certified financial planner in Chicago. So if you go this route, you may want to consult a certified public accountant to make sure you don't run afoul of the tax rules.

And if you rent out your house for any portion of a year, you don't get to count that year as one of the two in the past five that the house was your principal residence, he adds.

Mr. Weil also advises running the numbers to make sure you could afford to carry the costs of homes in Arizona and California in months when you might not collect rent. "You need rainy-day money if the house isn't rented, or if it's not rented at the rate you expected. It's a big bet -- will the market in California come back in the next two to three years? The last time this happened, the cycle took a lot longer," he warns.

Another thing to consider: If one spouse dies before you sell the house, the surviving spouse's exclusion eventually gets cut in half. A tax rule that took effect Jan. 1 gives surviving spouses the $500,000 exclusion on the home sale for two years after the date of death. After that, the exclusion falls to $250,000.

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