Jump to content
ATX Community

Exclusion on primary residence


Pacun

Recommended Posts

house has 4 floors and it was purchased 10 years ago and tax payer has lived there with wife since it was purchased for $600K. For two years 50% of the house (two floors) were rented and depreciation allowed or allowable was $14,545. Rented the whole years of 2019 and 2020. On march 31st 2021 was sold for $1,100,000.

A class instructor said that as soon as you rent, you split the property into two, which doesn't make any sense. Any ways, based on the information above, the tax payer will pay taxes only on the $14,545 which is depreciation recapture, correct?

Link to comment
Share on other sites

2 hours ago, Lion EA said:

Was the whole house again personal residence in 2021 up to the sale? If so, you have to deal with the ratio for unqualified use vs qualified use.

On another thread a couple of years ago, I was clarified that once you have lived in the house before renting it, you don't have unqualified used. Meaning that as long as you lived in the house 2 year out of 5.  So no unqualified use here.

4 hours ago, cbslee said:

What was the status of the apartment from January 1st thru March 31st 2021?

The rooms were converted to personal use on 1/1/2021 until the primary residence was sold. 

 

4 hours ago, ILLMAS said:

The other apartments were never rented before 2019?  

No, the portion where the owners lived was never rented. The half of the house rented was where the adult children lived prior to getting married. 

Link to comment
Share on other sites

43 minutes ago, Pacun said:

once you have lived in the house before renting it, you don't have unqualified used.

Nonqualified use would only occur if the house was converted from a rental to a personal residence.  Nonqualified use does not come from converting a residence to a rental, see Section 121(b)(5)(C)(ii).

 

 

  • Like 1
Link to comment
Share on other sites

1 hour ago, Lion EA said:

OP's client converted to rental and then converted back to personal. Doe the personal use after renting trigger the qualified vs nonqualified use ratio?

I don't see why it would.  As I read this thread, the 5 year period referred to in  Section 121(b)(5)(C)(ii) started on January 1 2019 when a portion was converted from rental to personal and would extend beyond the period of first three months of 2021 when it was used one again for personal purposes.  

I might also question as to whether the rental portion was actually converted back to personal use, or whether for practical purposes, they chose not to rent in the short period prior to the sale.

Link to comment
Share on other sites

3 hours ago, Lion EA said:

So, as long as you live in the house for two years before it's a rental, then you never have to worry about personal use after the rental and still qualify for the full exclusion, less depreciation, when you sell?

 In the OP, taxpayer converted a portion from personal to rental on Jan 1 2019.  From that date, he had a three year window to sell the house for the full exclusion under the 2 out of 5 year rule of section 121; and meet the exception for nonqualified use under section 121(b)(5)(C)(ii).

The basic rule here is that after conversion from personal to rental, you have three years to sell it to qualify for the exclusion; if it was used for personal use for two years prior to conversion and if there was not any nonqualified use prior to the personal use.

I believe the purpose of the code is to prevent an investor from using a home as a rental for a number of years, then live in it for two years for the exclusion.

On the other hand, a taxpayer is allowed to convert from personal to rental and meet the exclusion by selling within three years, provided they have never rented it out previously.   If the house is not sold with three years of conversion to a rental, then nonqualified use is a moot point since there is no exclusion allowed.

 

  • Like 3
Link to comment
Share on other sites

Thank you. That was a good explanation. I thought that 33 months of personal use followed by 2 years of rental use followed by 3 months of personal use meant they were subject to nonqualified use. I do like it better that as long as they had 24 months of personal use before rental use in the selling window that they never have to deal with nonqualified use if they return to the house as their residence prior to the sale.

Link to comment
Share on other sites

 Section 121(b)(5)(C)(ii) provides a break to taxpayers that for whatever reason end up renting for a short time period after they move out.

For example, a family moves away due to a job change, but with the possibility they might move back within three years.

  • Like 3
Link to comment
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...