Sale of Home Used as Residence and for Business

[Sudhir]

I have a situation where the taxpayer used a home as the primary residence (75%) and rented the other 25% to his "C" corporation (the tax payer was sole shareholder of the corporation). The 75% was the upstairs of the house and the rented portion was downstairs. All of the rented years, the corporation issued a 1099 for the rental paid to the tax payer and the taxpayer filed schedule E on his personal returns for the 1099 income and deducted 25% of the expenses of the building such as property taxes, utilities etc and claimed depreciation for the 25% of original building cost. in 2020 the building was sold by the tax payer for a gain. I am inclined to allocate the selling price and basis 75/25 and exclude the gain for the 75% of the sale price less 75% of basis and selling expenses. Is this the correct way to report the gain or can the gain on the entire sale be excluded under section 121 and only recapture the depreciation claimed over the years on the rented portion. Thank you in advance for any gudiance and references.

[ATSMAN]

If the sale of your home qualifies for exclusion under the Sec. 121 ($500,000/$250,000) rules:

1. Determine the part of your home based on square footage that is your personal residence and the part that is used for business.

2. Calculate the gain on the sale of your home (total amount received for your home less your tax basis in the home and any selling expenses).

3. Allocate the gain between the residence and business portions based on the square footage allocation that you calculated above.

4. Allocate your Section 121 exclusion first to gain from sale of the residence portion of your home. If this gain is less than the maximum available exclusion, you can apply the remaining amount of the exclusion to reduce potential gain from sale of the business portion of your home.

There may be other acceptable methods that could be used.

[Sudhir]

Thank you Atsman. Appreciate you taking the time to respond.