Primary/Rental home sale

[Avs19]

Hi,

I have a client getting ready to sell a home that she partially lived in and rented out. She lived in the basement for the last 5 years and rented the upstairs portion at the same time. They shared the utilities but had two different entrances. Do you think she can take the full $250,000 exclusion or does she need to exclude the top half since she did not live in it? I was a little confused by the examples in publication 523 so thought I might ask. 

Thanks

[sjrcpa]

Gain attributable to the top half is taxable since she did not live in it for 2 out of the 5 years prior to sale.

[BobKamman]

Give us some more facts and circumstances.  Is the land itself worth $1 million and the replacement cost of the improvements only $100K?  Does it have two kitchens?  How many bathrooms?  Garage, carport, driveway?  Was tenant a relative?  Was she filing Schedule E and claiming depreciation on, what percentage of basis?

[Avs19]

The land is probably worth around 50K. No improvement costs. I believe it's set up as two living units. Which means it's own kitchen and bathrooms. Tenant is not related. She was filing a schedule E and depreciating the upstairs portion. 70% of the house is upstairs.

I know that duplexes are split and maybe this falls into the same category but am not 100%.

Thanks!

[Accountant-Man · Accepted solution]

She can only exclude up to 30% of the gain.

[Avs19]

That's what I figured

Thanks for your help!

[BobKamman]

It's not what you believe, it's what the facts show.  The issue is whether there are two dwelling units here, or just one.  The fact that there are separate entrances, points to two.  But was there still access from basement to upstairs?  Was it used?  Did the owner use any of the upstairs for storage or occasional events or other purposes?  Pub 523 depends for authority on the Regulations.  You might want to review Examples 3, 4 and 5 under (e)(4), starting at Page 14 here:

https://home.treasury.gov/system/files/136/archive-documents/po37162.pdf

[Avs19]

She did not have access to the upstairs and it was not used for any of her purposes. The best IRS example is the duplex which I would asume this example falls under.