Dual Purpose Property Sale

[Snaggletooth]

Basis of residence $90,000. Owner moves into another house and tries to sell first residence. Housing market is depressed and owner is not willing to take what the depressed market will bring. Owner is now paying two mortgages.

After six months, owner decides to cut cash flow losses and rent out his former residence. Finally, after one year, owner sells former residence for $190,000. Depreciation taken during period of rental, $1500.

Which of the following is (are) true? More than one of the following may be true.

1. When owner converted to rental property, immediately it ceased to be treated as a former residence for purposes of exempting gains.
2. If too much time elapses after not living in house, the $500,000 exemption on gain is reduced, but not necessarily below the range of gain in this example.
3. If too much time elapses after not living in house, the exemption on gain is reduced on a pro-rated basis of recent years divided by five.
4. The $1500 depreciation is recaptured as a §1250 property transaction irrespective of whatever other gains or exemptions may be reported.

[Gary2]

This seems like a homework or exam question.

1: False; see page 17 of Pub 523.
2: I have difficulty seeing how this particular set of circumstances could possibly qualify for a reduced exclusion.
3: False: Without looking at the math, it reads as though the exclusion is always reduced in this manner, but as far as I know you can only claim a reduced exclusion in specific circumstances, starting on page 15 of Pub 523.
4. False if read literally and technically. First, 1250 recapture only occurs when deprecation is more than straight-line, and that isn't likely to be the case here. Second, it's not clear that "1250 property transaction" is even a well-defined term. Third, even if the intent is unrecaptured 1250 gain being taxed, it depends on other gains or losses that may be reported on the return. Assuming that the $1500 is the correct depreciation (i.e. allowable), then the most you can say is that it can't be excluded.

[Snaggletooth]

Multiple Choice

Gary, thanks for the response. Converting the question to an old-fashioned schoolbook "multiple choice" is helpful to focus on the situation as it is easier to quantify than to wander around an otherwise poorly-defined thought process. Was certainly not meant to drive away readers by reminding them of grade school.

Even so, I don't think I did a good job. Should have been more specific about dates and how long the owner had not lived in the house. Also a dichotemy of what is really meant by depreciation recapture. (I really meant to ask whether the reported gain would have to include the depreciation rather than whether it is LTCG).

[snowshine]

OOH, OOH, I want to play!

1. False, typically it takes at least 2 years before the IRS will admit a change in the character of the property. In cases where the TP is renting while trying to sell they are even more reluctant to change to, "business" property, at least in the case of a loss. I don't see why it matters here.

2. True, but not in this example. Remember the 2 of 5 rule

3. False, this example does not qualify for the prorated exclusion as the TP voluntarily left the property (the proration is for, "hardship" cases." Without the hardship rule there is no exclusion if use falls below 2 of 5 years.

4. Sort-of, as explained by Gary. In this instance the $1500 needs to be recaptured as there is enough profit.

[Davc]

4. Sort-of, as explained by Gary. In this instance the $1500 needs to be recaptured as there is enough profit.

Read Gary's number 4 again. You recognize Unrecaptured 1250 gain, you don't recapture it.