Sale Principal Residence/Rental

[cpabsd]

I have a client who sold a rental property that meets the qualifications for Sale of Primary Residence. My question is regarding the depreciation taken during period of rental. ATX is subtracting that amount from my basis therefore increasing my gain. Is this correct? Is this a legal way to avoid the Unrecpatured Section 1250 Gain? Just want to make sure I am doing this correctly. Thanks for any help.

[erchess]

I believe that your software is correct on this issue.

I am sure that what you describe would be the way to handle things if your client had had a home office that had been depreciated.

[cpabsd]

Clarification

It is not a home office situation. It is actually a home that was the clients primary residence. They bought another home and converted first property into rental. After 2 years as a rental, they sold the property. It still qualifies as sale of personal residence. How is the depreciation handled that was taken while the house was a rental? I can not find clarification anywhere. Thanks

[erchess]

I realize that it is not

a home office situation. But the two cases share in common having prior depreciation. I am inclined to see the depreciation as the determinative fact here and say that you are correct. If you wanted to be sure you could ask NATP or whatever professional group you may belong to for a researched opinion. A member who called NATP on Monday would have an answer on Tuesday.

[solomon]

Yes

Sec. 121 exclusion applies but the unrecaptured 1250 gain does not get excluded. The sale would be reported on 4797 in this case.

[jasdlm]

How to input with ATX software

cpabsd, there was a pretty good discussion about this on the ATX board. If the person qualifies for Section 121, the suggestion from the ATX board was to complete the asset disposition for 4797. Then, in section I of the 4797, enter the gain as a negative amount. (I completed one last week; entered a 0 sales price and a basis equal to the amount of the gain. I typed 'Section 121 Exclusion' on the description line. Part 3, of course, still showed the gain calculated w/o the exclusion. The 1250 gain flows through to the 1040.

I think this was a suggestion from joan.

jas

[jainen]

it is correct

>>ATX is subtracting that amount from my basis therefore increasing my gain. Is this correct?<<

Certainly it is correct. Depreciation reduces your adjusted basis; that is a simple fact. When you determine your gain, the portion of gain caused by the accumulated depreciation is not subject to exclusion.

Use Form 4797 if it was rental property at the time of sale. Otherwise use the worksheets in the instructions to Schedule D. The calculation of adjusted basis and gain, exclusion, and unrecaptured 1250 gain is the same in either case.

This is a good example of when you should work a problem by hand before keying it in to the software. That way you can understand and verify the numbers at each step. It's hard for us to help you with the data entry because we all use different software.

[Joe Btfsplk]

I paid tax on the gain for home office

When I sold my previous home, I used the Sec 121 exclusion for the non-office portion of my home and reported a gain for the portion of the sale attributable to the home office. I used ATX, but I don't remember exactly how I entered it. I think I probably omitted the rest of the sale and just reported the portion attributable to the home office.

The method described above would also be a good way--report the entire sale, and use the excluded portion of the sale as the basis; i.e. not the cost, but the excluded part of the sales price.

[jainen]

a good way

>>a good way--report the entire sale, and use the excluded portion of the sale as the basis<<

That is NOT a good way, because it won't correctly identify the gain attributable to depreciation as unrecaptured Section 1250 gain. It also mischaracterizes the gain that is excluded.

CHALLENGE: Can anyone tell me what is wrong with just following the instructions? Capsd says he "can not find clarification anywhere," but it is explained line-by-line on page 2 of the instructions to Form 4797--report the sale of business property (the entire property) in the ordinary way in Section III, and report the exclusion on Line 2.