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Rental real estate home converted to primary residence and back to rental then sold

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    Rental real estate home converted to primary residence and back to rental then sold

    Client has a second home at the coast, rented it 8 - 10 weeks each year for the first ten years. Then it became his primary residence for the next three years and it was not rented. After this three year period, it was rented 8 - 10 weeks a year for two and a half years then it was sold in 2018. It was not his primary residence during the two and a half year period, but he used the address as his primary residence (this does not allow him to call it his primary residence since he did not live there, correct?). I need help on how to treat the sale. Thanks very much!

    #2
    Which Tax Prep software are you using? If you are using Drake enter the data in the HOME screen. You will need to input depreciation taken, # of days used as primary residence for the prorated Sec. 121 exclusion. On the 4562 Screen enter the date sold, sales price etc. and the software should calculate the taxable gain etc.

    If you are not using Drake I am assuming your software has similar data input screens or worksheet.
    Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDR

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      #3
      It was a rental when it was sold, so the sale is reported on Form 4797.

      It was his primary residence for at least 2-out-of-5 years, so he qualifies for an exclusion. That exclusion is also entered on Form 4797 as a negative entry.



      However, there is "Nonqualified Use". The actual calculation uses days, so you will need to know the EXACT dates of everything to figure out the number of days. I'll use a simplified version to explain things, using full years. Let's say it was a rental 2003-2012, his Principal Residence from 2013-2015, and a rental again 2016-mid2018.

      The time after it was his Principal Residence don't count as Nonqualified Use. The rental time after 2008 but before it was his Principal Residence is Nonqualified Use. So of the first 10 years of rental, only 4 of those years are after 2008. So using rough numbers, there are 4 years of Nonqualified Use. There was a total of 15.5 years of total ownership, so 4/15.5th's (about 25.8%) of the gain (before depreciation) can NOT be excluded.

      So let's say the house was bought for $100,000, he was able to take $20,000 of depreciation, and sold it for $200,000. So out of the total gain of $120,000, he has (1) a $100,000 profit, plus (2) $20,000 of Unrecaptured Section 1250 Gain from the depreciation.

      Of the $100,000 profit, 25.8% of that does NOT qualify for the exclusion. That means 74.2% DOES qualify. So he qualifies for an exclusion of $74,200. That leaves the other $25,800 of profit to be taxed at long-term capital gain rates (usually 15%), plus the $20,000 of depreciation (taxed at regular tax brackets, up to 25%).


      Does that make any sense? Again, the actual calculation uses days, but I gave a simplified explanation using years.

      If you need help with how to enter it in your software, you will need to tell us what software you are using.

      If you need further clarification on things, let us know.

      .
      Last edited by TaxGuyBill; 08-12-2018, 05:05 PM.

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        #4
        Home rented then converted to primary residence then to rental then sold

        Thanks very much for the responses. I use Intuit Lacerte tax software. I have done a few home sales in my experience but not one like this. I appreciate the guidance and I will reach out if I have additional questions.

        Carl

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