Client sold personal residence in December 2015 and realized a gain; however, there is no tax consequence because the taxpayers meet the IRC 121 exclusion of gain rules. Personal residence had been a rental property from 2007 through 2013 while taxpayers were stationed in several states and oversees as part of the uniformed service. Would the taxpayers still have to report as long term capital gain the depreciation taken while residence was a rental? For what it's worth - there is no passive activity loss carryforward.
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Yes. That portion of the gain equal to depreciation taken after (I believe) May 6, 1997, can not be excluded by ยง121.Roland Slugg
"I do what I can." -
There is a nice worksheet in TB. I am not at the office so can't give you the page #.Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDRComment
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...but I don't believe this to be be capital gain but regular income with a maximum rate of 25%.Comment
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Depreciation Recapture - Passive Losses
Thank you all for the responses. I appreciate them very much. The taxpayers originally did use the property as a personal residence from 2001 through 2007 before converting it to a rental. Also, they are not affected by the non qualified use rule because of the military deployment. So, they just have to report $34K in ordinary income due to depreciation recapture. Although it doesn't apply to my client, the rules seem unfair that you can't use some of that passive activity loss carried forward (PAL CF) amount to apply against the depreciation recapture. In theory, the PAL CF had imbedded depreciation that couldn't be taken advantage of, so why does a taxpayer have to report the recapture?Comment
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"You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard
"That's enough! When you didn't know what you were talking about, you really had something! [to Curly]" -Moe HowardComment
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Unrecaptured section 1250 gain
See Schedule D line 19.Comment
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can't the depreciation taken be used to reduce the basis of this home? in doing so, reduces gain on sale?Comment
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"You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard
"That's enough! When you didn't know what you were talking about, you really had something! [to Curly]" -Moe HowardComment
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my bad!!! would increase gain. but gain would be part of the exclusion, right?Comment
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