Q-1:

Subject: Particular Capital Gains situation

Hello.

From 2002 to end of 2005 I rented 2 of the 3 rooms of my house. I have always lived in one room myself.

I would like to sell the home in 2006 (this year) but first I would like to estimate the capital gains tax.

Is it true that I cannot simply claim the home (my only property) as my primary residence and thereby take advantage of the $250,000 capital gains exclusion?

Must I pro-rata the rental as a portion of the home and in that way avail of some of the $250,000 capital gains exclusion.

If pro-rata were the route to take how could it be calculated, particularly since I do not rent rooms in 2006?

Thank you

A-1:

There are to many possible scenarios involved here for me to make any suggestions.

You need to work with your personal professional tax advisor to work out the best way to handle the sale of mixed use property. 

Good luck.

Kerry Kerstetter

Q-2:

Kerry Kerstetter,

Thank you for the quick reply.

There is only one scenario. I am selling the house this year but lived in it for 10 years and rented out rooms for the last 4.
I will just ask one question then, in case you would have an opportunity to re-visit this.
Can I claim some of the $250,000 or is it an all or nothing situation?

Thank you

A-2:

It is actually much more complicated than you understand.

At a bare minimum, you will have to recapture depreciation claimed since May 6, 1997.

From the way you described it, this sounds very much like a tri-plex, where two-thirds of the units were rented out and you occupied one-third as your primary residence.  Under that scenario, you would need to report the sale on your tax return as if it were a sale of two different kinds of properties.  Two-thirds of the sales price would be shown on Form 4797 as sale of rental property, with appropriate figures for the cost basis and depreciation. 

The other one-third of the sales price would be shown on Schedule D, using the appropriate cost basis for that portion of the house.  The gain on that sale would be eligible for the exclusion of up to $250,000 of profit.

If you were to wait to sell the home until more than two full years after your tenants left, the sale could be shown as one sale of a primary residence, with the full gain eligible for the $250,000 exclusion, except for post 5/6/97 depreciation.

Another issue to discus with your personal tax advisor is the possible taxes on the sale of the rental two-thirds and whether you want to do a Section 1031 like kind tax deferred exchange on that portion, which would require you to reinvest into new business, rental or investment real estate within 180 days.  You can see the rules for that on www.tfec.com.

I hope I made my point that there are several factors to analyze, and you need to do it with a qualified professional tax advisor or you could very easily make a very expensive mistake.

Good luck.

Kerry 

Follow-Up:

Kerry,
Thank you sincerely for putting your time into this.

 

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- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/11/2006 11:42:00 AM Send this post: