Jump to content
ATX Community

Rental & 121 Exclusion


Recommended Posts

Client purchased property on 12/14/2014, converted the property from personal use to rental 6/1/2018. Sold the property in December 2020. Isn't this out of the time window to claim the 121 exclusion on the sale? 

Link to post
Share on other sites

He DID use it for 2 of the last 5 years, so he can get a reduced exclusion on the gain, recapture not withstanding. 

https://www.journalofaccountancy.com/issues/2002/oct/thehomesalegainexclusion.html

...

EXECUTIVE SUMMARY

 TO EXCLUDE GAIN ON THE DISPOSITION OF A HOME from income under IRC section 121, a taxpayer must own and occupy the property as a principal residence for two of the five years immediately before the sale. However, the ownership and occupancy need not be concurrent. The law permits a maximum gain exclusion of $250,000 ($500,000 for certain married taxpayers). The IRS has issued proposed regulations to clarify how these rules work in certain situations....

  • Like 3
Link to post
Share on other sites

Thanks Possi, I realized after I posted this that this property was indeed their primary residence for two of the last five year period prior to the sale. The client did their 2019 return on Turbo tax and for some reason they depreciated the property at 50% use. According to their records, the property was converted to rental in June of 2018 and rented for 365 days. I think they used the 50% business use due to renting the property of half of the 2018 year. The recapture of the depreciation won't be that much. But, it looks like 2019 needs amended with a 3115 to correct the depreciation. Folks don't realize the mess they can create if they don't know what they're doing.

 

  • Like 2
Link to post
Share on other sites

If it was only one wrong year (2019) you can amend. Two years or more means an accounting method and a 3115 to change. And, remember that depreciation is what was taken or should've been taken.

  • Like 1
Link to post
Share on other sites
3 hours ago, Possi said:

so he can get a reduced exclusion on the gain, recapture not withstanding

I am not following you in regards to "a reduced exclusion" since the 2 out of  5 year rule was met.

If you are referring to the Nonqualified Use Ratio of 121(b)(5)(B); that would not apply here since the house was converted from personal to rental.

The Nonqualified Use Ratio would only apply if the conversion was from rental to personal.

  • Like 2
  • Thanks 1
Link to post
Share on other sites
12 hours ago, Terry D said:

But, it looks like 2019 needs amended with a 3115 to correct the depreciation.

3115 is not an option in this case because it is a math or calculation error instead of an accounting method change.

Keep in mind that 3115 is not a catch all for depreciation errors.

10 hours ago, Lion EA said:

If it was only one wrong year (2019) you can amend. Two years or more means an accounting method and a 3115 to change

If this was in fact an accounting method change instead of a calculation correction, you could waive the 2-year rule under REV PROC 2007-16 and make a 481 adjustment in year two.  

I just had a case where there was a greater benefit to take the adjustment in year 2 rather than to amend for year 1.

  • Like 2
Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Restore formatting

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    No registered users viewing this page.

×
×
  • Create New...