residence converted to rental and then sold

[schirallicpa]

Why is it in November my brain just stops working?  

Guy has residence he purchased in 2013.  In 2017 he moved in with girlfriend and rented his house.  Now they're married and bought another house.  Selling his.  Since he changed it to business asset, does he loose his residence sale exemption of $250,000?  

 

[Margaret CPA in OH]

From handy dandy Quickfinder - If the business or rental portion of the taxpayer's home was used as a personal residence for two of the five years before the sale, the taxpayer can exclude the gain on the entire home (except for any depreciation allowed or allowable after May 6, 1997).  An example provided even uses the same years as your client!  So up to $250,000 less the part of the gain equal to the depreciation allowed while renting the house.

[schirallicpa]

My quick google search told me the taxpayer forfeited the exclusion when he converted house to business.  That's why I'm confused again. 

I swear - after October 15, just don't ask me to do any tax work again until December 15.....

[jklcpa]

Margaret has it right!

Love your brain picture.  After 10/15, many of us are "vacationing" or needing to do this:

[schirallicpa]

love you guys on this forum

[Tax Prep by Deb]

Correct me if I am wrong but I believe this was changed a few years back.  I believe a partial exemption but not full.  

I will have to double check but I do believe you forfeit full exclusion.

[Lion EA]

There's something about days of non-qualified use, but it's different if before primary residence use (or after primary residence use), so do track down the new code before you tell client.

[jklcpa]

@schirallicpa, read the linked page for sec 121 for yourself and see what you think regarding the period of nonqualified use as it applies to your client's fact pattern where I believe your client falls into the exception in sec 121(b)(5)(C)(ii)(I) . Here's what it says:

Quote

(C) Period of nonqualified use

For purposes of this paragraph—

(i) In general - The term “period of nonqualified use” means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.

(ii) Exceptions  The term “period of nonqualified use” does not include—

• (I) any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse,

 

[DANRVAN]

16 hours ago, jklcpa said:

where I believe your client falls into the exception in sec 121(b)(5)(C)(ii)(I) .

I agree, the nonqualified use occurred after he used it as his personal residence so it meets the exception.  On the other hand, if he had rented it before it became his residence that would be nonqualified use.

[Pacun]

This is what you do. You need to know if they qualify for the exclusion by looking at the 5 years before the sale.  If within those 5 years they owned and lived in the house for 2 years (taxpayer OR wife), then they qualify. Now, you have to count all days that he/she or they owned the house and also count all the days that the house was rented.  Let's say that he bought the house on January 15, 2013 and that he moved out and rented it on January 15, 2017, and let's say that he sell it on January 14, 2020, then you will have to this calculation:

ALL days 8*365=2922 (two leap years)
Rented days (not-qualified days) 3*365=1095 (no leap year involved)

So you will divide the profit and only a portion will be excluded.

Don't forget the depreciation allowed or allowable that he needs to considered and the recapture that needs to take place too. 

[Tax Prep by Deb]

3 hours ago, DANRVAN said:

I agree, the nonqualified use occurred after he used it as his personal residence so it meets the exception.  On the other hand, if he had rented it before it became his residence that would be nonqualified use.

This too is what I found out researching it yesterday.  I had a client in a similar situation except it was a rental before she moved into it, do there are non qualified days, but correct me if I'm wrong, we don't go back to when the house was first purchased to establish non qualified days, we begin from January 1, 2009 correct?

[jklcpa]

@Pacun, no, this is not correct.  Please see the exception in the code sec I posted above.  Because all of the rental came after the period of being used as a residence, as long as the taxpayer used it for 2 years out of the last 5, hasn't used the exclusion on another home in the last 2 years, and meets the use requirement, he or she will be allowed the full exclusion.  The only thing will be to segregate out the gain resulting from the depreciation taken that will be taxed at ordinary rates.

[DANRVAN]

Look at it this way, you can move out of your home and rent it before you sell it with out reducing the exclusion.

But, if you convert a rental to your personal residence your exclusion is reduced by the portion of time it was previously held as a rental.

It actually kind of makes sense.

[DANRVAN]

20 minutes ago, Tax Prep by Deb said:

we don't go back to when the house was first purchased to establish non qualified days, we begin from January 1, 2009 correct?

The law went into effect 1/1/2009 so you do not go back further than that date.

[Tax Prep by Deb]

Thank you for the confirmation.  I goofed on one of my clients and in researching this helps right a wrong.  Should have known that but don't remember coming across the info until just now.  Will amend and client will get a pretty good refund!