Sale of Condo

[LINDAAHILL]

If the condo was converted from owner occupied to a rental in 2013, should its sale in 2020 be treated as the. sale of a home.  A 1099s was issued.

[dascpa]

A very confusing item arises:  See:

In addition to the limitation of Section 121 regarding depreciation recapture, as a part of the Housing Assistance Tax Act of 2008, Congress further limited the exclusion of capital gains for property that was converted from a rental to a primary residence. The new rules, enshrined in IRC Section 121(b)(4), stipulate that the capital gains exclusion is specifically available only for periods during which the property was actually used as a primary residence; any other time (since January 1st, 2009) that the property was not used as a primary residence is deemed “nonqualifying use”. Accordingly, to the extent gains are allocable to periods of nonqualifying use (gains are assumed to be pro-rata over the holding period), those gains are not eligible for the exclusion.

[Just-Lisa-Now-]

So from 2013 to 2020 the condo was a rental?

[BobKamman]

@dascpa Why would Section 121 have anything to do with it?

[dascpa]

Don't know if link was bad or they changed Code section but it's 121(5) as shown below.

(5)Exclusion of gain allocated to nonqualified use

(A)In general

Subsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use.

(B)Gain allocated to periods of nonqualified useFor purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which—

(i)

the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to

(ii)

the period such property was owned by the taxpayer.

(C)Period of nonqualified useFor purposes of this paragraph—

(i)In general

The term “period of nonqualifed use" means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.

(ii)ExceptionsThe term “period of nonqualifed use" does not include—

(I)

any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse,

(II)

any period (not to exceed an aggregate period of 10 years) during which the taxpayer or the taxpayer’s spouse is serving on qualified period of extended duty (as defined in subsection (d)(9)(C)) described in clause (i), (ii), or (iii) of subsection (d)(9)(A), and

(III)

any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the Secretary.

[BobKamman]

@dascpa Where are you finding two years out of five, for Section 121 to apply?  I don't get past the first paragraph.  

Section 121(a) Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.

[dascpa]

Bob -

The two out of five only works if it was your principal residence the ENTIRE time.  The issue here is the property was a prior rental property and then converted to a principal residence.  When that happens the IRS says there "may" be a period on nonqualified use.  And if so then an allocation of the gain must be done for that period.  This site won't allow for web links but search for moving into your rental to avoid taxes.

[TaxGuyBill]

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@LINDAAHILL wrote:

converted from owner occupied to a rental in 2013

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If it was converted from personal use to a rental, that means it was a rental when it was sold, right?  If so, it is sold as a rental and the sale should go on 4797. 

In the event the FMV in 2013 was less than the Adjusted Basis at that time AND it was sold for less than the current Adjusted Basis, you might need to factor in the 2013 FMV.  But if it was sold at a gain, don't worry about that at all.

Unless they moved due to "Qualified Official Extended Duty" (usually a change of military orders), nothing needs to be indicated about it formerly being a Principal Residence.