Section 121 question

[John Hua]

Hi all, 

Me and my wife live in our SFH full time for the past year. In the upcoming year, we are getting roommates to help with expenses while continuing occupying as primary residence. We have ~400k in gains after improvements. My questions is how does section 121 apply in our situation(married couple)?

-If we sell after year 2, do we claim 250k(yr 1) and 125k(yr 2 with half the house rented) for total deduction of 325k gain? 

-What happens if we continue to rent out half the house, does at some point we get to claim the full 500k deduction? 

or is it calculated differently entirely?

Thanks in advanced!

John

[Michael Plaks]

Quote from @Bill B.:

If you’re lucky maybe @Michael Plaks will weigh in. I don’t think he’s ever been wrong. I’d take his answer carefully to the bank. 

Thanks for the shoutout, Bill. I HAVE been wrong quite a few times and, luckily, have been corrected by my colleagues in those instances. This collaboration is one of the great benefits of being on BP.

@John Hua - I have a short answer and a disclaimer that there may be a need for a much longer answer.

Short and therefore simplistic answer: roommates in a shared SFH do not cancel the fact that it is your primary residence. Once you clear the 2-yr mark of living there yourselves, you can likely use the full $500k.

Disclaimer: I said likely, because there could be a mountain of complications, as well as some different opinions from my peers. The key part to my opinion is that you have a single-family home with shared space, as opposed to a duplex or a two-level house which would be two separate "dwelling units." You have a single dwelling unit, I believe. There is also a relatively minor issue of recapturing depreciation on the rental portion. And we also need to distinguish between for-profit room rentals and cost-sharing roommates, which is a big can of worms that I don't want to debate. So yes, it could lead us deep into the woods quickly.