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Rental & 121 Exclusion


Terry D EA

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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....

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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.

 

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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.

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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.

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  • 2 weeks later...

If he used it 2 out of the 5 and then sold it, does he have to recapture the depreciation if the total gain is under 250,000?

https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/property-basis-sale-of-home-etc-5

"Generally, the law allows an annual depreciation deduction on your rental property and you must reduce the basis of the property by the amount of your depreciation deductions. If you don't claim some or all of the depreciation deductions allowable under the law, you must still reduce the basis of the property by the amount allowable before determining your gain on the sale of the property.  

The gain attributable to the depreciation may be subject to the 25% unrecaptured Section 1250 gain tax rate. Additionally, taxable gain on the sale may be subject to a 3.8% Net Investment Income Tax. For more information, see Questions and Answers on the Net Investment Income Tax. Refer to Publication 523, Selling Your Home and Form 4797, Sales of Business Property for specifics on how to calculate and report the amount of gain."

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