Gain exclusion

[Pacun]

Diplomat lived in the US for 3 years and then he was transferred to Europe for 2 years. Then he came back to states and lived in the states for 2 years.

 

He bought a house as soon as he got to the states, lived in it for 3 years and then rented it for 2 years and claimed depreciation. Then he lived in the house for 2 years and sold it.

He filed 1040NR to report rental income for 2 years and he will file a 1040NR reporting the sale.

 

Purchase price 350K

Depreciation taken 24K

sold for 400K.

 

Does he qualify for the exclusion?

 

[kcjenkins]

He qualifies under both the ownership and the use tests, but he cannot exclude the part of the gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997.

 

Also consider Unrecaptured section 1250 gain.   This is the part of any long-term capital gain from the sale of your home that is due to depreciation and cannot be excluded. To figure the amount of unrecaptured section 1250 gain to be reported on Schedule D (Form 1040), you must also take into account certain gains or losses from the sale of property other than your home. Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose.

[Pacun]

Let me see if my thinking is correct (new case but similar).

 

You own a house for 6 years and you make a profit of $600K.

 

You rented it for 2 years and took depreciation for $50K.

 

So now you have 4 kinds of income, included the income that was excluded.

 

50K (ordinary income because it is depreciation)

200K gain while the house was rented. What kind of income?

350K income which you can exclude 250K because you lived and own the house for 2 years in the last 5 years. What kind of income?

[kcjenkins]

50K ordinary income from dep recap.

 

550K LTCG, OF WHICH 250K IS EXCLUDED.

[Pacun]

Thank you KC for the info.

 

Let's say that a person sells a house on January 2nd with 1,000,000 gain and he is moving out of the country. His only income for that year will be 10K of interest the million dollars will make. This person for that year will be on the 0 tax bracket, so he will put in his pocket a million dollars tax free? Why will he bother with the exclusion?

 

So, if a single person makes $150K a year and he has a million dollar gain in the house, he should NOT work that year or he will be paying the IRS more than what he will make. Does what I am saying sound right?

[SaraEA]

If the house was located in the US, he is not in the 0 bracket.  He has $1m gain and $10k interest income. Even without the $150k wages, cap gains rate at that level is 20%.  Interest income will be in the 35+ percent tax bracket (too lazy to look it up).  (Don't forget the state taxes where the house is located.)  I don't know if he's a US citizen or not, but most treaties tax property sales based on where the property is located.  Best to keep his $150k job.  Or go into real estate--he should be congratulated on that $1m gain.  Wow.

[Pacun]

If the house was located in the US, he is not in the 0 bracket.  He has $1m gain and $10k interest income. Even without the $150k wages, cap gains rate at that level is 20%.  Interest income will be in the 35+ percent tax bracket (too lazy to look it up).  (Don't forget the state taxes where the house is located.)  I don't know if he's a US citizen or not, but most treaties tax property sales based on where the property is located.  Best to keep his $150k job.  Or go into real estate--he should be congratulated on that $1m gain.  Wow.

 

I forgot about the Cap when the 20% kicks in. Thank you for the refresher. I love this forum.