Main Home Converted to Rental

[sami]

I have a client who converted her main home to rental and now wants to sell it. I have been reading different places and getting contradictory information. Does any one has any lead to a link or tutorial or any tax library subscription you can recommend which explains tax implications on sale of home converted to rental. Does the client losses the section 121 exclusion or not. I am clear that taxpayer has to recapture the deprecation. I know the rules changed in 2008 and client purchased the home in 2006. Thanks in advance on helping a junior tax preparer.

[TAXNJ]

if you do a search with the words in your title you will find many related posts such as the one below:


https://forum.thetaxbook.com/forum/d...rted-to-rental

[TaxGuyBill]

In a nutshell:

(1) You are correct, there will be Unrecaptured Section 1250 Gain (tax on the gain from the depreciation), assuming it is sold at a again.

(2) As long as they meet the 2-out-of-5 year and the one-exclusion-in-2-years rules, they qualify for an exclusion.

(3) Prior to converting it to a rental, if it was always their main home since they bought it, they would qualify for the full $250,000/$500,000 exclusion (except for the gain based on the depreciation) and the 2008 changed rules won't affect it. In the event there was a prior period that it was NOT their main home or if they were to move back into the home now, then the 2008 rules may come into play.

[TAXNJ]

!,,,,. Does any one has any lead to a link or tutorial or any tax library subscription you can recommend which explains tax implications on sale of home converted to rental. Does the client losses the section 121 exclusion or not…..

Yes, The TaxBook Web Library is a very good source, e.g.,

Depreciation Category Section

6-5 Conversion of Personal Property to Rental Use

6-6. Sale of principal residence with prior rental use.

Taxpayers can exclude gain from the sale of a primary residence that has also been used for business or rental purposes if the exclusion of gain ownership and use rules are met.

For sales after December 31, 2008, any gain allocated to periods of nonqualified use is not excluded from gross income.

Non qualified use is any period (not including any period before January 1, 2009) during which the property is not used by the taxpayer as a principal residence.Post-May 6, 1997 depreciation.

The part of any gain equal to depreciation allowed or allowable after May 6, 1997, cannot be excluded.

Author’s Comment:

Business use of a home, such as an office in home where the home is also used as the t axpayer’s primary
residence, is not considered non qualified use. Thus, with the exception of post May 6, 1997 depreciation, gain attributable to the office in home portion of the home is excludable under IRC section 121. See Business Use of Home Methods,next column, for more information….


6-23. Deluxe Edition Category

Business Use or Rental of Home—Application of Exclusion Rules

[sami]

Thank you all replying. So If the taxpayer has owned the home for 10 years and lived in it for 3 initial years and rented the last 7 years prior to the sale then the section 121 exclusion is fully gone.

[TaxGuyBill]

Yes, UNLESS they moved out due to qualified extended duty (such as for the military).

[TAXNJ]

Thank you all replying. So If the taxpayer has owned the home for 10 years and lived in it for 3 initial years and rented the last 7 years prior to the sale then the section 121 exclusion is fully gone.

There is more in depth information in The Tax Book Web Library that you may find helpful since you are looking for a on line Tax Library source. Have you tried it?