Sale of Home - Home Exclusion Question

[peggysioux]

Taxpayer buys home that sits on 50 acres and he decides to use 45 of those acres for ranching. If taxpayer prorates mortgage interest between home/5 acres and remaining 45 acres and applies the mortgage interest from acreage to Farm Schedule, when he decides to sell 10 years later, will the gain of the sale pertaining to the acreage be excluded from the home exclusion deduction?

Peggy Sioux

[TaxGuyBill]

I would say no. Separating it out is essentially saying that land is not part of his Principal Residence.

[ATSMAN]

TaxGuyBill is correct. I had a similar situation with a client who had a large tract of land and one dwelling on the front road. He rented most of his backyard to a cell and solar company. He sold the dwelling and took the home exclusion (self prepared return). Then several years later when he was my client he wanted to use that exclusion when the solar company bought him out.

[peggysioux]

From pub 523:

• Space formerly used for business or rental. Space that was once used for business or rental purposes may be considered as residence space at the time of sale. A space formerly used for business is considered residence space if ALL of the following are true.
  • You weren’t using the space for business or rental at the time you sold the property,
  • You didn’t earn any business or rental income from the space in the year you sold your home, and
  • You used the space as residence space for 2 years out of the 5 years leading up to the sale.

If your space is considered as residence space at the time of the sale, then your former business usage DOESN’T affect your gain/loss calculations, unless you took or were allowed to take depreciation for use of your home for business or rental purposes. See Worksheet 2, line 5, below.

Based on the above information, I would think that if taxpayer ceases using land as business for 2 years out of the 5 years leading up to the sale, then taxpayer would meet the exception and 100% of capital gain (with the exception of any business depreciation from buildings on property used for business in the past) would be eligible for sale of home exclusion. With the above information, do other tax preparers see a reason why taxpayer would not be eligible for exclusion?

Peggy Sioux

[ATSMAN]

But in the OP you said that the 45 acres was used for Farming and expenses related to that was deducted on Sch F??

How do you expect to meet the exception? An open field is not exactly a primary residence?

[Lion]

Peggy, you have to do more than just stop using the land for the business of farming. You have to use the land as residence space for 2 years out of 5 before the sale. Mow the lawn, plant flower beds, add a swimming pool and tennis court, put up a swing set, jog, picnic, set out lawn furniture and a pergola, turn the barn into a party barn, use it as part of the residence. Not just let it sit; that would be investment property and not a personal residence.

[Rapid Robert]

Mow the lawn, plant flower beds

Wow, 45 acres is a lot of flower beds and lawn mowing. Does this pass the laugh test? Especially since he's already been using 5 acres as part of his residence (I wonder how long it takes to mow the lawn on the existing 5 acres).

[Lion]

My point. Are they really using 45 acres plus the 5 with house as their personal residence?

[peggysioux]

Thanks Lion for the informative explanation as to why the 45 acres would not meet the exception.

Peggy Sioux

[TAXNJ]

.....when he decides to sell 10 years later, will the gain of the sale pertaining to the acreage be excluded from the home exclusion deduction?

Peggy Sioux

Are you saying 10 years from now? If yes, current tax laws may be different in 10 years as it applies to the scenario.

You did bring out some interesting information in your second post.

[Toobusy]

I agree with Peggy. If the Ranch is for personal use only, at least 2 of the five years leading to the sale, and the other conditions in Pub 523 are met, then TP can claim the home exclusion deduction.

[Rapid Robert]

I agree with Peggy. If the Ranch is for personal use only, at least 2 of the five years leading to the sale

Except that is NOT what Peggy said. She said "if taxpayer ceases using land as business for 2 years out of the 5 years leading up to the sale". The difference is the whole point, as other responders have explained.