Home office-Does ths sound right?

[Joe Btfsplk]

Home is purchased and a home office was used for the first 12 months. Use of the home office was discontinued after the first 12 months and the owner lived there for 18 more months, then sold it at a profit.
The home office portion of the profit on the sale would be taxable.

But: if the sale were posponed form another 6 months, he would have then used it solely as his principal residence for two of the last five years so no tax would be due on the home office portion assuming it was under $500,000 & he filed MFJ.

[jainen]

not that bad

No, it's not that bad. Unless the office was a separate structure, the business use would be ignored in determining the 2-out-of-5 years. The only part of the gain that could not be excluded under Section 121 is the amount of depreciation taken on the home office.

[OldJack]

I agree with Jainen. Joe you are thinking about how it was before the tax code of §121. Now days the "office in the home" does not disqualify the fact that it is a personal residence where the gain can be excluded. In your case the full sale (price less cost equals gain) is reported on 1040 Sch-D with the next line subtracting the §121 exclusion (less depr) resulting in a Sch-D taxable gain equal to all depreciation allowed or allowable.

[Joe Btfsplk]

Apparently my message was not clear

My question must have been misstated. I realize that only the gain on the office portion would potentially be taxed. However, I was asking about a possible way to exclude even that part of the gain (i.e. depr).

My question was: would the home office still be taxed on depreciation claimed IF the home office had NOT been used during the last two years, but had been used previously as an office.

The othe aspect of the question: would it be taxed if it had NOT been used for the last year and a half, but had been used as an office prior to the 1 ½ years. In this case, I would assume the depr would definitely be taxed.

[Unregistered]

You cannot exclude the depreciation taken after 5/6/97 regardless of your circumstances. See §121(d)(6)

New York Enrolled Agent

[Bill Tubbs]

Taxable portion...

is only the depreciation that was taken since Sec 121 applies.

My question must have been misstated. I realize that only the gain on the office portion would potentially be taxed. However, I was asking about a possible way to exclude even that part of the gain (i.e. depr).

(Assuming office is part of the main home structure) No, the gain on the office portion is not taxed. Only the depreciation taken is recaptured.

My question was: would the home office still be taxed on depreciation claimed IF the home office had NOT been used during the last two years, but had been used previously as an office.

The othe aspect of the question: would it be taxed if it had NOT been used for the last year and a half, but had been used as an office prior to the 1 ½ years. In this case, I would assume the depr would definitely be taxed.

Regardless of when the home office was, the depreciation since 5/6/97 needs to be recaptured (assuming house sold at a profit)


Bill

[jainen]

This is reasonable

>>You cannot exclude the depreciation<<

This is reasonable, you know. The taxpayer has ALREADY deducted those amounts. In fact, he got an even greater benefit because the exclusion would only offset capital gains, but the deduction offset ordinary income (often taxed at a higher rate and subject to SE tax). He also realized those tax savings years earlier than the exclusion allows.

Be sure to fill out ALL of Schedule D. The depreciation goes on Line 18, and is taxed at up to 25%.

[RLymanC]

Conversion of rental unit

Home is rented out for 10 years, then the owner converts it to a personal residence for 5 years. Is the depreciation excluded in this case, or is Sec. 121 allowed on 100% of gain up to the limits?

[Bees Knees]

Depreciation after may 6, 1997 cannot be excluded under section 121. It doesn't matter how long the house was converted back to 100% personal use. The only exception is an inherited house.

[jainen]

don't you understand?

>>Home is rented out for 10 years, then the owner converts it to a personal residence for 5 years. Is the depreciation excluded in this case, or is Sec. 121 allowed on 100% of gain up to the limits?<<

See this morning's posts by Bill Tubbs and New York E.A. What part of 5/6/97 don't you understand?

[Joe Btfsplk]

The consensus is depr is recaptured

I raised this question because on the Yahoo group "TaxTalk" someone claimed that discontinuing the office use for two years would prevent recapture. This seemed questionable to me, but I thought there might be some little-known way around the recapture.

Apparently someone made a faulty interpretation, but the person making the claim seemed to be sure of himself. Maybe he was like me: often wrong, but never in doubt.

[Armando Beaujolais]

I raised this question because on the Yahoo group "TaxTalk" someone claimed that discontinuing the office use for two years would prevent recapture. This seemed questionable to me, but I thought there might be some little-known way around the recapture.

Apparently someone made a faulty interpretation, but the person making the claim seemed to be sure of himself. Maybe he was like me: often wrong, but never in doubt.

Old rules.

[jainen]

No gain, no pain

>>discontinuing the office use for two years would prevent recapture<<

Actually, this may turn out to be true for many of our clients over the next two years, if property values continue to drop. No gain, no pain.

[Bees Knees]

I raised this question because on the Yahoo group "TaxTalk" someone claimed that discontinuing the office use for two years would prevent recapture. This seemed questionable to me, but I thought there might be some little-known way around the recapture.

Apparently someone made a faulty interpretation, but the person making the claim seemed to be sure of himself. Maybe he was like me: often wrong, but never in doubt.

NY EA gave you the cite. Section 121(d)(6). Nothing in that section gives you an exception for converting the property back to personal use. Take that cite over to the Yahoo group and see what they have to say about it. Ask them if they can find an exception to Section 121(d)(6).

[veritas]

I raised this question because on the Yahoo group "TaxTalk" someone claimed that discontinuing the office use for two years would prevent recapture. This seemed questionable to me, but I thought there might be some little-known way around the recapture.

Apparently someone made a faulty interpretation, but the person making the claim seemed to be sure of himself. Maybe he was like me: often wrong, but never in doubt.

I think "Yahoo" TaxTalk says it all.