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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28081
Experience:  Taxes, Immigration, Labor Relations
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In 2011, my mother sold her house for $200,000, which she and

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In 2011, my mother sold her house for $200,000, which she and my father purchased in 1962 for $17,500. In 1999, she converted the second floor to an apartment, which she rented to acquaintences and relatives for somewhat less than market rate. She claimed the rent as income, and claimed expenses and depreciation against that income, resulting in a net loss for most, if not all, the years between 1999 and 2010. She now faces a tax assessment of more than $10,000 on the sale of her property. The property was her primary residence for the entire time. Unfortunately, she does not have good records and receipts for improvements during her ownership of the property. Does this amount of tax seem right? After renting less than half of her house, for 11 out of 49 years?
Submitted: 4 years ago.
Category: Tax
Expert:  Lev replied 4 years ago.
Hi and welcome to Just Answer!
If the property was rented for less than a fair market value - that is no-for-profit rental.
In this case:
- no depreciation is allowed
- no rental losses may be deducted against other taxable income.
If that was done incorrectly - your mother would generally need to amend her past tax returns and might be liable for additional taxes and penalties.
If depreciation was deducted correctly - it should be recaptured and added to their other income. Assuming the depreciation basis was $20,000 - total depreciation was $20,000 / 27.5 * 11 = $8000 - that amount should be recaptured.
Your wrote - she converted the second floor to an apartment - that actually means - there are two separate dwelling units - and capital gain should be calculated separately for each unit. If that is correct - only one unit may be treated as a primary home, The other unit would be treated as a rental property and the full capital gain will be taxable.

Unfortunately - original incorrect reporting triggered issues for following years.
There is no simple solution.
Let me know if you need any clarification.
Customer: replied 4 years ago.

Thank you for your answer.


Specifically, how is the percentage of the property divided between the primary residence and the rental? Does the length of time used as rental enter into the equation? If 35% of the usable square footage was used as rental for 11 out of the 49 years, what percentage would be assigned to rental for capital gains purposes?

Expert:  Lev replied 4 years ago.

In most situation - the property is divided based on square footage - these are two different units are treated as two separate properties.

If the rental part is 35% - you would allocate 35% of the selling price and of the basis - to rental part.

The length of time that the property was rented - would affect only the amount of depreciation.


She may not exclude from taxable income the capital gain realized from the selling her rental unit.

Customer: replied 4 years ago.

Thank you.


So the capital gain is taxed as such and also counts as taxable income?

Expert:  Lev replied 4 years ago.

I am not clear what do you mean "also' - there is NO two type of taxes.

The capital gain is added to other taxable income and the tax liability is determined based on the total income, filing status, deductions, etc.

The gain realized from the sale of rental property is taxable.

A part of the gain attributable to the depreciation recapture is taxed as a regular income - maximum rate 25%.

The rest of the gain is taxed as a long term capital gain - at reduced long term capital gain rate - not more than 15%.


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