Rental Converted to Personal Residence

[Forensicacctnt]

In the crunch of the season, I would greatly appreciate guidance on the following. Townhome purchased ($58,000) and rented from July, 1987 to December 31, 2010. Owner moved in January, 2011 and sold ($97,000) it in 2016. I understand the depreciation recapture starts with May, 1997 not 1987? What is the correct and best way (worksheets) to determine the recapture and the basis for determining gain/loss on sale. I do have the depreciation that was recorded in the tax returns except for two years. I was not the accountant during those "rental" years.

Many thanks for anyone who can help at this time.

[taxea]

Allocate by days owned vs days the TP occupied the residence.

[TaxGuyBill]

Without looking it up, these are my thought and this is what I remember:

Publication 523 has the worksheets to walk you through it, but since they revised Publication 523 a few years ago, that Publication is absolutely horrible, confusing, and has errors in it.

The two missing years should not be a problem because the depreciation should not have varied each year.

All depreciation lowers the Adjusted Basis.

The pre-May 7th, 1997 is eligible for the $250,000/$500,000 exclusion.


The tricky part is that you have “nonqualified use”.

You need to calculate the non-principal-residence days after 2008 (in your case it would be 730 days) and divide it by the total number of days of ownership. Because I don’t know the number of days, I’ll use estimated years, and say 2 years divided 29 years of ownership, which would be 6.9%. So 6.9% can NOT be excluded. Again, the real calculation uses days.

Let’s imagine that there was $20,000 of pre-May7th, 1997 depreciation and $27,000 of post-May 6th, 1997 depreciation. Let’s also say there were no improvements and the house sold for $97,000.

The $27,000 of gain based on the post-May 6th, 1997 cannot be excluded. That is Unrecaptured Section 1250 Gain, and is taxed at regular tax rates, up to 25%.

For the other $59,000 gain ($20,000 of depreciation and $39,000 profit above purchase price), 6.9% can not be excluded due to "nonqualified use". So about $1380 is more Unrecaptured Section 1250 Gain ($20,000 x 6.9%) and $2691 is long-term capital gain ($39,000 x 6.9%).

Does that help you at all?


Edited: I originally did not see that you included the sale price, so I adjusted my answer to accommodate that amount.

[Forensicacctnt]

Rental Converted to Personal Residence

Without looking it up, these are my thought and this is what I remember:

Publication 523 has the worksheets to walk you through it, but since they revised Publication 523 a few years ago, that Publication is absolutely horrible, confusing, and has errors in it.

The two missing years should not be a problem because the depreciation should not have varied each year.

All depreciation lowers the Adjusted Basis.

The pre-May 7th, 1997 is eligible for the $250,000/$500,000 exclusion.


The tricky part is that you have “nonqualified use”.

You need to calculate the non-principal-residence days after 2008 (in your case it would be 730 days) and divide it by the total number of days of ownership. Because I don’t know the number of days, I’ll use estimated years, and say 2 years divided 29 years of ownership, which would be 6.9%. So 6.9% can NOT be excluded. Again, the real calculation uses days.

Let’s imagine that there was $20,000 of pre-May7th, 1997 depreciation and $27,000 of post-May 6th, 1997 depreciation. Let’s also say there were no improvements and the house sold for $97,000.

The $27,000 of gain based on the post-May 6th, 1997 cannot be excluded. That is Unrecaptured Section 1250 Gain, and is taxed at regular tax rates, up to 25%.

For the other $59,000 gain ($20,000 of depreciation and $39,000 profit above purchase price), 6.9% can not be excluded due to "nonqualified use". So about $1380 is more Unrecaptured Section 1250 Gain ($20,000 x 6.9%) and $2691 is long-term capital gain ($39,000 x 6.9%).

Does that help you at all?


Edited: I originally did not see that you included the sale price, so I adjusted my answer to accommodate that amount.

Thank you very much for the information and your guidance. Also, I have looked at Pub. 523 but was not aware it is not reliable. Thanks again! Carl Allen