Sale of home converted to rental

[FEDUKE404]

Never mind.

[TaxGuyBill]

Yes, 4797.

As for the §121 exclusion, why did the client move? Does it qualify for any of the 'safe harbors' that allow less than 2 years? The most common is a job change to another area (which includes military reassignment).

[ATSMAN]

Check Pub 523 for the exceptions. They seem to be fairly generous. You say the home was sold for personal issues. See the exception list regarding, divorce, health, unforceable events etc.

[ATSMAN]

So, do you follow the law and use the facts, or do you pick the facts to fit the (more favorable) law?
(Don't think I've ever run into a situation like this one. . .)

If it was me, I would strictly look at the facts that are disclosed and if it does not fit the law for a favorable outcome, I would tell the prospect there are two choices. I can do the return based on the law and you will not get what you want or you can find someone else.

About 5 years back, I was faced with a similar situation from a client of mine (retired state trooper). He wanted me to look at the facts with a very open mind, and make it fit the law and I refused and lost him as a client.

[TaxGuyBill]

There was indeed a military transfer.

Was he using the home as his Principal Residence when the orders for the transfer happened?

If so, it qualifies for the Partial Exclusion (assuming the transfer was 50 miles further away from the home than his previous assignment).
If not, I haven't seen anything in your posts that would allow the §121 exclusion. It would just be a sale of a rental property on 4797.

[ATSMAN]

>> .....even though the owner is in the military, where I don't even see the military broader ownership rules as having any impact.

I think the OP made the determination (I think) that this was not a military related move but rather for personal reasons.

I would caution against "creating facts" to fit the law.

[TaxGuyBill]

Even if the move was for personal reasons, if the transfer order happened when it was his Principal Residence, it still falls under the Safe Harbor and would qualify.

[TaxGuyBill]

Agree that the military "stop the clock" clause could be an issue. But where I stumble there is the 24-month usage rule, which appears not to have been met. Is that not a game-ender?

If you go down that path, isn't perhaps the best outcome to hope for would be a partial gain exclusion via the §121 route?

FE

The "stop the clock" aspect for military does not pertain in this situation.

isn't perhaps the best outcome to hope for would be a partial gain exclusion via the §121 route?

FE

Exactly. The Partial exclusion may be available if there was a job-change, which includes military reassignment (or any of the other situations that qualify for the Partial Exclusion). But it only pertains if that job change happens when it was used as his Principal Residence. In this case, the "partial" exclusion would actually be a full exclusion (except for the deprecation), IF the taxpayer were to qualify.

Absent the completion of IRS Form 1040-INTENT, exactly what governs the explanation that a temporary rental (at fair market value) occurred for one year until the home was sold under better market conditions (there had been a hurricane nearby) versus a scenario where the same rental facts apply except the personal residence had been "converted" to a rental property?

I'm not trying to be deceptive, but I just see a lot of VERY gray zones in this scenario.

What is the difference? Wouldn't it be the same tax treatment either way?

I don't see any gray zones in the information you have presented so far. What exactly do you think is a gray zone that would affect things?

[TaxGuyBill]

Form 4797 with a 'partial' §121 exclusion.

It was a rental in the year of the sale, so it goes on Form 4797.

The taxpayer received his 'job change' while it was his Principal Residence That qualifies for the Safe Harbor. It is not a military exception, it is a 'job change'. It doesn't matter why he sold it or his intent, it qualifies for the Safe Harbor.

The Safe Harbor allows him to claim roughly 22/24ths of the $250,000/$500,000 exclusion. His gain is well under that, so there won't be any tax on the gain, EXCEPT for the gain based on the depreciation.


Some software isn't set up to claim the §121 exclusion on Form 4797. If that is the case with your software, then you may need to manually make a second 'sale' on Form 4797, calling the sale "§121 Exclusion" with a loss equal to the exclusion.

[terryats]

TaxGuyBill, when ever I do a 4797 with a Section 121 I only use one 4797. I just write Section 121 exclusion on part 1 line 2 in description, then skip to column G and put in the exclusion as a negative number (I use ProSeries and have to override column G). This is in the IRS instruction for 4797 page 3 "sale of home used as business". This has always worked out for me

[TaxGuyBill]

Yes, maybe I phrased it poorly. I didn't mean a second form, I meant a second 'sale', similar to as you described. If you enter it as an actual sale of an asset, it will show up as you described but you don't need to override (I use ProSeries too).