Client rented a townhome from July, 1987 to December, 2010. Then she moved into the townhome in 2011 as her personal residence and sold it in 2016. Sale proceeds were $97,000. How is the gain calculated in this case? Thanks!
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Answer
You have the sale of a principal residence which gets Section 121 treatment just like any other principal residence, except you have to reduce the basis by the depreciation claimed during hte rental period. This depreciation is subject to unrecaptured 1250 gain if there is a gain. -
No, not correct. From TTB:Originally posted by Kram BergGold View Post
"Gain from the sale or exchange of a principal residence is not
excludable from income if it is allocable to periods of nonquali-
fied use. Generally, nonqualified use means any period in 2009 or
later where neither the taxpayer nor spouse (or former spouse)
used the property as a principal residence with certain exceptions""You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe HowardComment
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The gain is easy. The §121 Principal Residence exclusion to determine the taxable gain is much more difficult.
Gain is just (1) Sales Price (after sales expenses), minus (2) Adjusted Basis (usually purchase price, plus improvements, minus depreciation).
For the §121 Principal Residence exclusion, the actual calculation uses days, but for simplicity, I’ll use months and rounded, easy numbers. I’ll say it was sold in July (exactly 19 years of ownership).
It was not her Principal Residence for 24 months after December 31st, 2008, and it was owned for a total of 19 years (228 months). Therefore, that usually means she can exclude up to 204/228ths of the undepreciated gain (89.47%). Again, the actual calculation uses days, not months.
So to use an example, let’s say that purchase price was $50,000 (and no improvements), and there was $20,000 of depreciation. You said the selling price was $97,000. Although there is a $67,000 gain ($97,000 minus Adjusted Basis of $30,000), you can only exclude 89.47% of the undepreciated gain ($97,000 minus undepreciated Basis of $50,000 = $47,000). So you can exclude $42,051.
However, your case is slightly different. Because there is depreciation before May 7th, 1997, it gets even more complicated. The exclusion DOES apply to depreciation before May 7th, 1997.
So using my prior example, let’s say of the $20,000 of depreciation, $8,000 was before May 7th, 1997. That means you can also exclude 89.47% of that $8,000 of depreciation ($7158). So you could exclude a total of $49,209 ($42,051 in the first example, plus $7158 of depreciation).
Depending on your tax program, it could be challenging to report it on your software.
Does that make any sense, or is it too complicated?
If you aren't sure about it and you need someone to double check your calculations, you could give us ‘real’ (exact) information so we may be able to give you ‘real’ numbers. We would need (1) Cost Basis (purchase price plus improvements), (2) Purchase Date, (3) Date it became their Principal Residence (4) Depreciation before May 7th, 1997 (including improvements), (5) Depreciation after May 6th, 1997 (including improvements), (6) Sale Price (after sales expense), and (7) Sale Date.Comment
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There is a worksheet in IRS Pub 523 that you might find helpful. It starts on page 15 of that Pub.Roland Slugg
"I do what I can."Comment
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