Tx put a $38,000 mother-in-law building on his $385,000 basis home property He then sold the home property for $780,000. Lived there 5 years, no capital gains.

[chapguy19]

He AirBnB the MIL for over a year or two.
How do I account for the "sale" of the MIL?
I want to just add it into the adjusted basis of the home.
And show that the MIL on his Schedule E sold for the adjusted depreciated value of the MIL.
Thanks in advance, Christopher

[TaxGuyBill]

If the Mother-In-Law building was not used as part of their main home, you enter the sale as the Fair Market Value of that building, and the §121 Principal Residence exclusion does NOT apply to it.

[itonewbie]

The MIL unit presumably within the same lot is a separate structure.  What you haven't stated is whether the MIL unit was used exclusively for AirBnB or whether your client actually did use and occupy that unit as part of his principal residence pursuant to Treas. Reg. §1.121-1(b) and (c).

The MIL unit being a separate structure, whether §121 may apply and, if so, to what extent would hinge on whether the use (and inevitable the occupancy) requirement, which is determined based on facts and circumstances, was satisfied as per Treas. Reg. §1.121-1(e)(1).

[chapguy19]

The MIL was a separate structure.

But then how do I value it because it was sold as part of the home?

Couldn't I argue that the Fair Market Value was the depreciated value?

It was never used for anything other than a rental.

Thanks, Christopher

[chapguy19]

The MIL was a separate structure.

But then how do I value it because it was sold as part of the home?

Couldn't I argue that the Fair Market Value was the depreciated value or as an increase to the adjusted basis.

It was never used for anything other than a rental.

Thanks, Christopher

[TaxGuyBill]

Does the main building qualify for the $250,000/$500,000 Principal Residence exclusion?

If so, the MIL building can NOT be included as part of the Basis because the separate structure does NOT qualify for the exclusion.

So if the main home is not taxable but the structure is taxable, you NEED to enter the sale at the Fair Market Value.  In most cases, the value would have increased since it was built (plus the depreciation lowers the Basis), so the sale of that separate structure will be taxable.

Some county property tax assessments value separate structures separately.   Many county property tax records may show something like the increase of value due to improvements during the year.  So if you get a copy of the valuation of before and after the structure was built, that would be a good estimate of the FMV at the time it was built, then estimate the average increase of real estate since it was built.