Have a new client and in 2004 taxpayer built barn and stables on property that his primary residence was as well. He depreciated barn and stables for a rodeo roping business in 04 and 05. He sold property in 06. Would he just have to pay tax on the 1250 unrecaptured depreciation and balance is excluded of any gain because he qualifies for 121 exclusion? Or would the FMV of the barn and stable at time of sale need to be determined and he pay tax on overall gain on that portion??
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Section 121 only excludes the dwelling unit, which would be the actual primary residence. See Reg. 1.121-1(e)(1)
Reg 1.121-1(e)(4) example 1, actually gives a nice example using your client's situation --a stable and a personal residence. You'll need to allocate the basis and proceeds between Sec. 121 excludable gain and the business portion of the sale.
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