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sale of former personal residence converted to rental

Forum|Forum|4 years ago
May 8, 2022
3 replies
25 views

Client has owned condo since 2005 and rented it out since 2018. She sold it in 2021, and PS is showing capital gains, even though she far exceeds the residence requirement. What am I doing wrong?

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Best answer by dkh

I had this scenario this tax season..... I learned something I did not know. Big difference in taxable situation if rented then transferred to primary residence prior to selling than if primary residence then rented then sold. In my case, although taxpayer lived in home the last 2years prior to selling, he still lost a portion of his $250,000 exclusion because it was rental then primary. Prorated based on total days owned to totals days rental.

Accountant-Man

Level 13

It sounds like what you're doing wrong is not understanding the law.

Did she live in it as her primary residence for 24 months during the last 60 months she owned it?

If she rented it out since 2018(when renting started?), rented 2019, 2020, and part of 2021(when sold?), she might have exceeded 36 months since she last lived in it.

If she sold it in the 37th month after renting started, SHE GETS ZERO EXCLUSION.

** I'm still a champion... of the world! Even without The Lounge.

GodFather

Intuit Community Champion

Let's assume the following:

Sale price: $750,000
Purchase Price: $250,000
Improvements: $50,000

The property was rented from 2005 through 2017. On 1/1/18 the property became the owners primary residence. It was sold on 12/31/21. Under this scenario, there would potentially be capital gain, correct? There would be a need to recapture some of the depreciation taken while the home was rented, no? Forget about the value of the land for now.

You don't come across these scenario's often and I would appreciate a kick start to my brain. Thanks.

dkh

Level 15

@GodFather your dates for renting and primary residence are flip flopped from what the OP stated

first it was residence 2005-2017 then it was rented 2018-2021

T

TaxGuyBill

Level 15

@lindadod0626 wrote:

What am I doing wrong?

You haven't told us what you've done, so it is pretty difficult to help you figure out what you've done wrong.

Have you confirmed they qualify for the exclusion?

Have you 'linked' the Asset Entry Worksheet to the Home Sale Worksheet, and filled out the Home Sale Worksheet?

Have checked what exactly is being taxed? The gain due to depreciation is not able to be excluded.

S

swarren69

Level 2

Your first mistake is posting a question without providing adequate information to effectively answer it. Second mistake is it appears you haven’t familiarized yourself with the IRC.

To receive capital gains exclusion, property must be occupied in 2 of the last 5 years. 2018 - 2021 is 4 years. Additionally, depreciation recapture would result in a basis reduction which, in turn, probably increased the capital gain. I’m attaching a helpful link.

https://www.marcumllp.com/insights/converting-a-personal-residence-to-rental-property

also beware that there are other issues to consider. For instance, were there multiple rental properties being run as single or multiple businesses?

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