I have a client who bought a house 30 years ago, for 40k refinanced in 2006,took out 477k, sold house in 2013 for 660k used the residence as a rental from 2009-2011 moved back in 2011 but continued to rent part of the house then sold in 2013. How should I treated, I know she can’t get the full 250k exclusion because she did use the property as a rental wrote off depreciation. Any help is appreciated
Correct as you said, as she needs to recapture the unrecaptured r/e recapture, sec 1250 recapture(As long as her rental property was depreciated using MACRS method(S/L method), there is NO sec 1250 recap potential; since the use of the S/L method is required for real pty acquired after 1986, there will be no Sec 1250 recap on the disposition of such pty. Sec 1250 recap is rarely seen
,)on her return when she disposes of the pty, she won’t be able to exclude the whole of $250K.I assume that she is single, then as , she lived in her home as a primary residence more than two years but decided to move out and turned the property into rental housing, when she sells the property she still qualifies for that primary residence exemption of $250K. So if her gain (profit) is less than those threshold, $250K, she will have no tax to pay on her gain, though she will have to pay depreciation recapture tax on the amount that she depreciated the property while it was a rental. Any depreciation allowed or allowable during the period that it was rented out is recaptured at sale time and is taxable at a higher rate than normal long-term capital gains, currently up to 25% aslongas her tax bracket is 25% o rhigher..In order to survive an IRS audit on the sale if a partial exclusion on any gain is being claimed she will need a professional appraisal of the value of the property as of the date that it's converted to rental use. This is even more important today with the fluctuation in property values over the past few years. Any gain/loss in value going forward once it's converted to rental is treated separately from any exclusion of gain on the sale of a personal residence. You still have to account for the gains separately (principal residence vs rental) since if there is a loss in value in the property once it's converted to rental that loss CAN be used to offset any other taxable gains. You still have the depreciation recapture to contend with as well and that's addressed as a separate item on Form 4797 when the property is sold So, even if the part of her pty used for non-residential purposes is within her pty ,i.e. room used for rental, she is treated as satisfying the use test for ht entire pty for purposes of the exclusion whether or not she was enitled to claim any depre deduction. No allocation of basis and amount realized from the sale is required, but the gain subject to excl, does not include any gain that must be reported on f4797 because if depre dedcutions allowed/allowable after May 6, 1997.
NOTE: the sale of an asset used for business purposes, such as a home that is rented for income, is reported on IRS Form 4797. as there was rental activity in the year the property was sold, the rental income and expenses are reported on Sch E just as it was in prior years. She needs to enter the sale proceeds on line 1 of Form 4797. The proceeds will be reported to her on form 1099-S. Form 1099-S will be mailed to her by January 31 of the year following the sale. She should skip Parts I and II of Form 4797 since they do not apply to the sale of rental real estate. She should record a description of the rental property on line A of Part III, line 19(a) of Form 4797. She needsto enter the date acquired and date sold on lines 19(b) and 19(c), respectively. If sh eis unsure of the dates to report, review your closing documents from both the original purchase and the sale. The date sold will also be included on form 1099-S. Enter the gross sale price of the rental home on line 20 under the column for Property A. Since she is only reporting one sale on Form 4797, the amount on line 20 will match the amount on line 1. she also should calculate the cost basis of the property, add expenses related to the sale of the property and enter the total on line 21. The cost basis is the amount you purchased the property for. Selling expenses allowed to be added to the cost basis include attorney fees, title fees and recording fees.