Sales - Split Usage

[Snaggletooth]

Taxpayer sold residence in 2011. There was an upstairs apartment that was rented out in 2007, 2008, and 2009 - three years during the five-year period. Upstairs apartment was appx 30% of total space, and that percentage was used to allocate expenses during the rental period.

1) Is 30% of the selling price treated separately on Form 4797, or is this percentage lowered by virtue of not renting for 2 of the 5 years?
2) Is the depreciation taken recaptured NO MATTER WHAT ELSE is reported?
3) Can loss be taken on the rental portion if a loss results, even if home was basically a residence?

[S T]

Would this help

Does TTB (starts on 6-18) maybe around 6-22 Business Use or Rental Property is separate from the home ----- help?

Sandy

[Snaggletooth]

Separate Identity

Thanks for responding Sandy. I was aware of TTB position, however, the question might be if the partitioned upstairs is definite enough to qualify for that treatment and to defeat regs which prevent taking a loss because of personal residence rules.

[appelman]

The words are "separate from..."

P. 18 of Pub. 523 gives some examples. Your case sounds more like what we in California call "a mother-in-law suite." I would think of it as part of your client's home and would consider it a stretch to call it a "separate part of their property." Again, look at the language of pp. 17-18 of Pub. 523.

[Roland Slugg]

Was the "upstairs apartment" a separate unit, making the building like a duplex or home with two separate flats? Or were the upstairs rooms part of the main house, connected via an interior staircase?

If the former, there were two sales, requiring an allocation of the SP and costs to sell. Report the sale of the rental part on F-4797 and the sale of the residence part on Schedule D ... unless the gain (if any) is entirely excludable under Code §121.

If the latter, no allocation is required, but the T/P cannot exclude the part of any gain equal to any depreciation allowed or allowable for the rental portion after May 6, 1997.

If the "two sales" applies to your client's case, and there was a loss on the sale of the rental property, it is deductible. Determine its basis by using its allocated original cost, as adjusted by improvements, depreciation, etc. If it wasn't always used as a rental, then its starting basis was the lower of its allocated portion of the entire property's cost or its FMV as of the date it first became a rental.

[Gary2]

How was the upstairs apartment used during 2010 and 2011? Wouldn't it change things if the apartment was converted back to personal use?

[Snaggletooth]

Good Catch

Gary 2, good catch, and certainly one of the factors behind me asking the question. In 2009 the owners had another child, and after the renters moved out, they used the upstairs for another bedroom for their growing family. In 2010 and 2011, upstairs was converted to personal use.

Roland Slugg, the upstairs apartment was not detached, or side-by-side as a duplex, but was accessible by an outside stairway. An interior stairway was blocked and not usable unless one wished to expend much time and effort to move stuff.

[Kram BergGold]

Interesting

You have one sale, or two depending.
I am assuming the upstairs was rented from the day the house was bought till it was converted to personal space. Given this, if the upstairs was used as a residence for 24 months you get the section 121 exclusion on the whole house and no loss can be taken.
However, taxes are due on the depreciation.
If the upstairs was not used for 24 months, then I would treat as two sales and claim the loss.

[Gary2]

I suggest looking at Pub. 523, under "Property Used Partly for Business or Rental", particularly the "Separate Part of Property Used for Business or Rental", and read all the examples to see what comes closest.

Don't forget to count the personal use during in 2006 and 2007 as part of the five years before the sale. Apparently all of 2010 counts, so if it was owned all of 2006, then you probably have the full two years (the 2006 part replacing the missing part of 2011 after the sale).

[Kram BergGold]

Reconsidered

while walking yesterday I realized that my previous advice was incorrect. As the property was converted to 100% personal use at the time of the sale you have oned sale. If there is a gain you take section 121 and tax has to be paid on depreciation. If there is a loss tax on depreciation is only paid if the depreciation is more than the loss.