Cap Gain on Sale When Home is Partial Rental & Primary Residence

[Ryan Faber]

I'm selling my house and want to understand the tax implications on the sale, because I have lived in it as well as rented out a portion of it. I've been studying IRS publication 523 and I would like to get some input. Here is my situation:

• I've owned and lived in my house as my primary residence for 3 years.
• Up until the last year, I have rented out spare bedrooms (space within the living area).
• I got married about a year ago and my spouse has now been living in the house as her primary residence for 12 months.

Question 1: IRS publication 523 states in the section under Business or Rental Use of Home, "If the space you used for business of rental purposes was within the living area of the home, then your usage doesn't affect your gain or loss calculations. Examples of spaces within the living area include a rented spare bedroom." I am correct to understand that renting out rooms in my house doesn't effect my eligibility for the exclusion?

Question 2: In going through the eligibility test, the only part I think I don't meet is Step 3--Residence, which requires 24 months of residence over the past 5 years. It also states, "Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion." Because my spouse will only be able to claim the house as her primary residence for 12 months am I correct to understand that we don't pass the eligibility test for the full exclusion?

Question 3: If I don't meet the full exclusion, I certainly meet the criteria for a "Work-Related Move," meaning that I would qualify for a partial exclusion. How would I calculate that partial exclusion?

Thanks!

[Ashish Acharya]

@Ryan Faber , 

Not to confuse you. I will make this simple. 

1) I would like to kindly disagree with @Joe Splitrock  and @Frank Chin . You do not have to exclude the portion of the house for the capital gain. Entire gain is qualified for the capital gain exclusion. What you read in the pub is correct. You have to exclude the gain only if the rented space was separate dwelling unit ( duplex). If you rented a bedroom out of the house, you qualify for entire sale exclusion. 

2) You will qualify for 250k exclusion. Your wife does not so no 500k, Only your portion. hope the gain is below 250k. 

3) However, you have to recapture the depreciation you took on the rental portion of the house. This is the depreciation you have taken so far time 25%. 

I dont think you have to worry about partial exclusion. 

So, the only tax you will pay is Deprecation * 25%. 

good luck.