Rental Property Converted to Personal Use - Sold

[Yardley CPA]

MFJ client purchased rental property in 2000.  Rented the property through June 2012.  In July 2012 couple moved into the rental property and converted it to personal use.  Some information on assets and depreciation through the date of sale:

 

Couple lived in home through July 2019 and sold it for 425,171 (Gross).  Closing costs amounted to  25,041. 

Is the basis at the time of sale 233,906?  Are the couple eligible for the homeowner exclusion on this sale?

Couple moved to Florida.  Rental Property was located in North Carolina.  I assume a NC return is required with no exclusion?

I would appreciate any insights you can provide.  Thank you.

 

 

 

[FDNY]

There should be a land component added to the basis.   There would be a Sale of personal residence exemption but of course the depreciation is taken into account.  Yes on NC return for any reportable amount and the fact that they may have received a 1099S at the closing that NC knows about.  I had exactly same scenario, only I heard house soon after got wiped out in hurricane after all my work.

[jklcpa]

Agree with FDNY on adding in basis of land.  They'll have the recapture of depreciation, and that recapture is not eligible for exclusion.  There are additional rules that apply to rentals converted to personal residence to determine the periods of unqualified and qualified use to determine the amount of sec 121 exclusion allowed, but unfortunately for your client, the recapture of depreciation already exceeds the entire gain on the property so there won't be any gain that is able to be excluded.

If you want to see how the calc for unqualified/qualified use is applied to the sec 121 exclusion, here is a pretty good explanation with an example: https://www.merriman.com/wealth-preservation/planning-on-moving-back-into-your-rental-in-the-future-read-this-first/

[Yardley CPA]

Thanks so much for the replies.

[Terry D EA]

I am in NC and yes on the NC return. Judy hit it right on the money and agree with both Judy and FDNY on adding the land component to basis.