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Old 03-02-2011, 04:38 AM
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Sale of Rental property formerly used as personal residence

Original business property was purchased in 1989, then sold and exchanged in 2004 for a rental property via a 1031 exchange. It was used as a rental for a few years, converted to a personal residence for over 2 years, converted back to a rental and finally sold in 2010. Property qualifies (meets the use/occupancy tests) for the 500K capital gains couple exclusion (with a small reduction via the new law for unqualified use post 2008). Total gain on the property was ~150K.

I have two questions:

First, for purposes of calculating the reduction in capital gains exclusion, would I use the original purchase date (1989) for the holding period because property was acquired via 1031 exchange or the date (2004) the replacement property was acquired?

Second, for purposes of reporting the sale, IRS says to use form 4797 because property was a rental at the time of sale, but when I do this Turbotax insists on racking up a huge AMT charge on top of the recapture/excluded gain tax. I also tried reporting the sale as a primary residence used part-time for rental use (what the IRS says to do if it was a residence at time of sale) which causes TT to only charge for the post-1997 recapture & post 2008 excluded gain tax, with no additional AMT tax.

I can't believe moving back into the property for 1 day before the sale would have allowed me to avoid a huge AMT bill. Am I missing something?

Thanks!!



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Old 03-18-2011, 04:11 PM
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Update - Holding period not relevant

Did some more research and determined the following as to question #1 (Holding period for reducing capital gains exclusion):

Since the home was used as a rental continuously from the time it was a personal residence until it was sold, there is no reduction in the capital gains exclusion. So the question as to which starting date to use (original purchase date or replacement property purchase date) is moot. Had we moved back into the property prior to the sale, the story would have been different...

Still haven't been able to figure out question #2, as to the AMT bill on sale of a rental property that was also used as a residence. Any ideas?

Thanks!



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Old 03-19-2011, 03:02 AM
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Answer for question #2

Found the solution for question #2 - Because TurboTax does not handle Form 4797 well, it requires that you first enter the sale info in "Enterable Form 4797". After that, you must override "Form 4797, p1", line 2, column g AND "Form 4797 AMT", line 2, column g with the section 121 exclusion amount. (Also write Section 121 exclusion in column A).

I had previously missed updating the AMT version of Form 4797 which resulted in the incorrect AMT bill. Turbo tax should really handle Form 4797, especially since it is the "Home & Business" version that they advertise "handles rental property business taxes".



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