Sale of Home (part rental)

[SOS]

I purchased a single family house on 1/29/02. I began renting out 50% of this residence on 06/01/02 and took a depreciation deduction for 2002. I continued to rent out 50% of this residence through 06/30/05 when I sold the residence. Throughout the entire time, I also lived in the house and used it as my primary residence.

I purchased the house for $375,000 and sold it for $550,000. In total, I took depreciation of $14,912 that I know I must recapture. Do I have to recognize 50% of the gain or is the entire gain excluded? I have been told both - that it needs to be recognized and that it is excluded.

Thanks!

[jainen]

It depends

It depends on whether the rental is a "separate dwelling unit." If you are just renting a room then you can ignore that usage under Section 121. If you have a duplex or a separate apartment, you must allocate 50% of the gain to the rental, which can not be excluded.

[abby]

rules did change

It is now true that you do not have to split your gain between the personal and business portions of the property if you do not have a clear demarkation between the two, as you would, say, in a duplex or a separate structure. If the business property is contained within your residence, such as you describe or, say, a home office, then you do not have to split the sale - just pay tax on gain up to the depreciation you've taken after 5/97.

[Bill Tubbs]

Depreciation

It is now true that you do not have to split your gain between the personal and business portions of the property if you do not have a clear demarkation between the two, as you would, say, in a duplex or a separate structure. If the business property is contained within your residence, such as you describe or, say, a home office, then you do not have to split the sale - just pay tax on gain up to the depreciation you've taken after 5/97.

The original post says that depreciation was taken in 2002, and presumably ever since (totalling $14,912). So, that leads me to believe that a half of the area is exclusively rental (or, depreciation was improperly taken). In which case the depreciation allowed/allowable must be reclaimed, plus 50% of the gain attributed to the rental.

Bill

[OldJack]

I purchased the house for $375,000 and sold it for $550,000. In total, I took depreciation of $14,912 that I know I must recapture.

You state that it is a single family residence which would appear to not have a separate entrance for the rental portion as such. Therefore, if you meet the residence exclusion requirements you would report the sale on 1040 Sch-D showing a taxable gain of $175,000± but on the next line claim code §121 exclusion for $160,088± leaving net taxable gain of $14,912 (depr taken).

[jainen]

line 19 of Schedule D

>>on the next line claim code §121 exclusion for $160,088± leaving net taxable gain of $14,912 (depr taken)<<

That's the wrong place to report the depreciation taken, Old Jack. It is treated as Unrecaptured Section 1250 gain, so you do the worksheet in the instructions and report it on line 19 of Schedule D.

[Unregistered]

I would do it just like Old Jack said, there should be no recapture 1250 gain, since you are using SL depr.

[OldJack]

>>on the next line claim code §121 exclusion for $160,088± leaving net taxable gain of $14,912 (depr taken)<<

That's the wrong place to report the depreciation taken, Old Jack. It is treated as Unrecaptured Section 1250 gain, so you do the worksheet in the instructions and report it on line 19 of Schedule D.

Well Jainen... I am right and you are right!!! Thanks for bringing the detail to the discussion.

The taxable gain of $14,912 is on line 8, page 1 as a net of the total gain minus the exclusion AND since it is equal to the depreciation it also goes on line 19, page 2, so that the correct capital gains rate (25%) is calculated.

[Unregistered]

You are both correct.

[jainen]

what I should have said

That's what I should have said. Assuming the rental was not a separate apartment (which original post has not confirmed), there is no need to allocate gain to the rental. Since total gain was less than 250K, all of it can be excluded on line 8 except the depreciation amount. Line 19 is used for calculating the tax, with a maximum rate of 25%.