Sale of Residence converted to Rental HUD

[AZ-Tax]

I want to make sure I calculated this correctly. Been a rental continuously 100% since mid 2011 up to the time TP sold rental in 2013. Upon looking at the HUD, I took the Ln 420 "Gross Amt due to seller" and subtracted the "loans/mortgages" on the rental which equals the "Expense of Sale".

Also, TP initially purchased this property in mid 2005 and used it for residence until mid 2011 so definitely satisfied the 2 out of 5 years for the exclusion of gain but I am 2nd guessing myself since it was converted to a rental.

[taxmom34]

I've never used the HUD statement that way, so I will not make comment on that. since TP qualifies for gain exclusion of a personal residence , the only thing I can see is adjusting the basis by lowering it by the depreciation taken. it would increase the gain if there is one.

[Burke]

That is not the correct way to calculate gain. You take the Gross Sales Price on page 1 of the HUD-1 as the Proceeds. You can add certain allowable expenses shown on the back (or page 2) for the seller to his basis. The mortgage payoff has nothing to do with anything and is ignored. Then you have to calculate his original basis for the rental property, add any improvements and subtract any and all depreciation taken to determine the Cost Basis. The net gain will have to be apportioned between long-term capital gain and unrecaptured gain-due-to-depreciation, and then adjusted between the personal use as a residence and the use as rental property. Don't forget the land basis which was not part of the depreciation (or shouldn't have been.)

[DonB]

In these situations I have reported the sale of a personal residence and recaptured all deprecation taken. IMO this is not the sale of rental property. I consider it the temporary rental of a personal residence until sold.

[Burke]

OP said it was 100% rental property after 2011. If he treated it as such on his tax return, then I think he has no choice but to calculate the gain accordingly. He never said it was a not-for-profit rental pending sale. If it were, he would have not taken depreciation and expenses in excess of income on his tax return. So how did he treat it?

[DonB]

. The net gain will have to be apportioned between long-term capital gain and unrecaptured gain-due-to-depreciation, and then adjusted between the personal use as a residence and the use as rental property.

I believe the correct way is to report on a 4797 as you described. But when you get to net gain, on the next line you subtract the allowed (unreduced) sect 121 exclusion. The result should be deprecation recapture as income. And in my thinking, you are done.