Rental Property

[hfsllc]

I have a new client who rented a property to a third-party through mid-2018. From that point on, the property was occupied by a family member who did not pay rent. The family member moved out summer of 2019. The property was for about 1 year before the client moved back into the house. The client sold the property at the end of 2021. This now raises the question of whether or not he can claim the property as primary residence two years out of the last 5 years. To make matters worse, his tax returns were prepared by one of the big box companies, they did no compute depreciation on the rental property; at least not that I can see back to 2018.

Question -  is based on the fact that no rental expense and income were included on 2020 tax returns, can it be construed that the property became primary residence starting mid-2019? Otherwise, how does one treat a vacant property?

Thank you

[George4Tacks]

Starting mid 2018, I do not believe it was a rental property any longer. To be a rental it must have at least an imputed income. If not a rental, then there would be no depreciation except for the time really rented to a 3rd party.

Summer of 2019 it sounds like it became a vacation or 2nd home and the interest (possibly) and taxes would go on Schedule A.

To exclude part of the gain on a primary residence they must have occupied the home for at least 730 days out of the 5 years preceding the sale. 

[hfsllc]

Thank you.

In terms of the mechanics in Proconnect, I am planning on treating the capital gain as gain on a primary residence which is less than the $250K/$500K. However, I will need to make the depreciation recapture as taxable capital gains? Do I just use a disposition date in this case mid-2018 with no disposition value? How do I enter the depreciation recapture?

Thank you,

[jeffmcpa2010 · Accepted solution]

You SHOULD NOT treat any time before he moved out of his other place of residence back into the house in question as time living in this house.

you said "The property was for about 1 year before the client moved back" ...

Did you leave the work "empty" out of the above sentence ? If so he would have moved back in mid 2020.(Relative moved out Mid - 2019 and house was empty for a year).

If I am interpreting this correctly the most time he could have lived there (as his primary residence) after he moved back in was about 18 months. 

Unless he lived there between some additional time between "Late 2016" and when it became a rental he does not meet the definition of "Primary Residence for over 2 years of the last 5" and Does Not Qualify for the exclusion. Claiming the exclusion when the taxpayers does not qualify would be a big mistake on a preparer's part.

If you still wish to claim the exclusion it all goes on the home sale worksheet - there is on Line 30 a place to enter depreciation allowed. You will need to fill out line 32 and 33 here also (possibly some others.)

If you are not claiming the exclusion I think it goes to form 4797.