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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
Satisfied Customers: 585
Experience:  10 years experience
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My current wife bought a home in 2005 for $300K and added a

Customer Question

My current wife bought a home in 2005 for $300K and added a room and remodeled the kitchen and other improvements for an additional $40K. We were married in 2010 and decided to rent her house and live in mine since it was now worth $200K. We have claimed about $26K in depreciation so far. If we take it off the rental market now and sell it for $280K, what will we pay in taxes? How about if we move back into it for two years and then sell?
Submitted: 1 year ago.
Category: Tax
Expert:  Marvin,EA replied 1 year ago.

Hello and thanks you for using Just Answer. If the rental portion of the taxpayer's home was used as a personal residence for two or more of the five years before the sale, the taxpayer can exclude the gain on the entire home (except for any depreciation claimed after May 6, 1997). Since you and your wife did not lived in the home in the past five you must claim any gain from the sale of the home. If you sale the home for $280,000 there will be no gain from the sale.

Customer: replied 1 year ago.
to clarify, the original cost was $300K plus $40K improvements but the free market value at the time of rental was $200K ($145K house, $55K land), less depreciation of $26K, we can still use the $340K basis against the sale price, making for zero gain even if we sell it today? I understand we would still have to pay depreciation recapture of $6500 or is that cancelled by selling for more than $26K under original basis
Expert:  Marvin,EA replied 1 year ago.

Since you did not lived in the home for 2 years within the last 5 years you do not qualify for the $500,000 exclusion. You must use the adjusted bases of $145,000 plus the land value less depreciation to determent the gain or loss from the sale of the home.

Customer: replied 1 year ago.
Ok so my followip question is lets say we hold onto it for another three years and move into it for two years and then sell it for $300K. In that time we will have depreciated it $42K. So, the property has a new adjusted basis of $158K. Lets say closing costs are $20K. So, now my gain is: $300K - [($200K - $42K) + $20K] = $122K gain. So, over the 15 years we owned it, it was rented for eight of those years. So, we lived in it for 7/15ths of the time (.47). Can we then cancel .47x $500K worth of gain, or $235K in gain? Or, since we only lived in it for two of the ten years that we lived in it since it was rented (and it had the new basis of $200K), can we only use (2 of 10 = 20%) of the $500K married exclusion against the $122K gain? In that case we would have $100K in qualified cap gains and have $22K in unqualified cap gains and $42K in deprec recapture to pay.
Expert:  Marvin,EA replied 1 year ago.

Gain attributable to a period of non qualified use cannot be excluded. This means that a portion of the gain on a principal residence may be taxable if that home was a used other than as a principal residence. Period of non qualified use is any time after 2008 that the taxpayer (or his spouse or former spouse) does not use the home as a principal residence.

Example: You bought and start renting the home on January 1, 2007 for $200,000. On January 1, 2012 you converts the property into your principal residence, where you and your wife live until you sold the on January 1, 2014 for $350,000. Your total ownership period is seven years (2007 to 2013). However, 2009 to 2011 is a period of non qualified use since the home was not your principal residence during those years (years before 2009 are not counted). You must report a $64,286 gain, as follows:

Period of non qualified use 3 years

Total ownership period 7 years

Total gain ($350,000-$200,000) $150,000

Nonexcludable gain (3/7 x $150,000) $ 64,286

The remaining $85,714 (150,000 - $64,286) of gain can excluded under Section 121 because you meets the two-year ownership and use tests for the home and has not excluded another gain in the previous two year.