All Forum Posts by: Jason V.

The thought just occurred to me after waking up.... that if you're selling the home as a rental, then Form 4797 might be the appropriate choice.

In my choice, however... I didn't have the best tenant, so I was fortunately able to get him out a month or so before selling.  I guess had he still lived there, Form 4797 would have been the proper choice.

 Mike,

This seems like forever ago, but I had gone to H&R Block, where most tax preparers there are *not* going to be familiar with this stuff.  My preparer reached out to the ONE guy more familiar with commercial knowledge at another local office, and the following method isn't quite what Mr. Plaks recommended, above, but it seems to even out.  From what was explained to me, this is pretty much the only way their software would allow them to exlcude the gains in this scenario.  If that's true or not, I do not know.

After reviewing the ~60 page tax document for that year, it looks like she added the following:

- Schedule D, Line 10 ("... all Txs reported on Form(s) 8949 with Box F checked") = Adjustment which equals all profit, excluding depreciation, and then the only gain was the depreciation.

- Form 8949, Box F is checked, as I received no 1099-B.  Same numbers as on Schedule D, with dates of home purchase & sale, and it mentions the following "Code(s) from instructions" under column (f), as "EH".  I have no clue what that means.  Exempt Home, perhaps?

- 2022 Worksheet 1 - Find Your Exclusion Limit (Publication 523).  Upon reading this, it looks like this really shouldn't have been used, as this is for a partial exclusion.

- 2022 How To Figure Your Gain Or Loss Worksheet (Publication 523).

- 2022 How To Figure Your Gain Or Loss Worksheet (Cont'd) (Publication 523).

- 2022 Determine If You Have Taxable Gain Worksheet (Publication 523).

- And, of course... Schedule E (for rental info), Form 4562 (for depreciation), and a couple other pages for Depreciation Schedules & Depreciation Allowance Adjustment.

I believe that Mr. Plaks' knows what he's talking about and H&R Block preparers do not.  However... that's why I pay for Peace of Mind.  If there's an error in the way they filed this, then it's on them.  But in the end, they got the tax on their depreciation recapture, which is all they'd get either way.

Quote from @Michael Plaks:

With these assumptions, it's full exclusion and you do not need Form 8949. You do need Form 4797 to calculate and report depreciation recapture and pay tax on this portion.

The only exception being that you were recently married and your spouse and you each had separate homes that you owned and lived for 2 of the last 5 years.

See: Example 3, above, regarding 

CFR § 1.121-2 - Limitations.

(a) Dollar limitations -

(3) Special rules for joint returns

Also, less trivial but still good to know is the evidence that my wife and I do NOT have to file separately, since she didn't meet the use qualification of Section 121....

See:  https://www.law.cornell.edu/cfr/text/26/1.121-2

26 CFR § 1.121-2 - Limitations.

(a) Dollar limitations -

(3) Special rules for joint returns -

(i) In general. A husband and wife who make a joint return for the year of the sale or exchange of a principal residence may exclude up to $500,000 of gain if -

(B) Both spouses meet the 2-year use requirements of § 1.121-1(a)

(ii) Other joint returns. For taxpayers filing jointly, if either spouse fails to meet the requirements of paragraph (a)(3)(i) of this section, the maximum limitation amount to be claimed by the couple is the sum of each spouse's limitation amount determined on a separate basis as if they had not been married. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property.

(4) Examples. The provisions of this paragraph (a) are illustrated by the following examples. The examples assume that § 1.121-3 (relating to the reduced maximum exclusion) does not apply to the sale of the property. The examples are as follows:

Example 3.

During 1999, married Taxpayers H and W each sell a residence that each had separately owned and used as a principal residence before their marriage. Each spouse meets the ownership and use tests for his or her respective residence. Neither spouse meets the use requirement for the other spouse's residence. H and W file a joint return for the year of the sales. The gain realized from the sale of H's residence is $200,000. The gain realized from the sale of W's residence is $300,000. Because the ownership and use requirements are met for each residence by each respective spouse, H and W are each eligible to exclude up to $250,000 of gain from the sale of their individual residences. However, W may not use H's unused exclusion to exclude gain in excess of her limitation amount. Therefore, H and W must recognize $50,000 of the gain realized on the sale of W's residence.

Example 4.

Married Taxpayers H and W sell their residence and file a joint return for the year of the sale. W, but not H, satisfies the requirements of section 121. They are eligible to exclude up to $250,000 of the gain from the sale of the residence because that is the sum of each spouse's dollar limitation amount determined on a separate basis as if they had not been married ($0 for H, $250,000 for W).

I found some more definitive answers that I don't think my tax preparer can refute.  Still wondering if I will be audited for claiming on the closing attorney's paperwork sent to the IRS that I used [a portion of?] the property for business or rental purposes....

Here's the irrefutable evidence, however, for future passers-by....

See:  https://www.law.cornell.edu/cfr/text/26/1.121-1

CFR § 1.121-1 Exclusion of gain from sale or exchange of a principal residence. 

(c) Ownership and use requirements -

(4) Examples. The provisions of this paragraph (c) are illustrated by the following examples. The examples assume that § 1.121-3 (relating to the reduced maximum exclusion) does not apply to the sale of the property. The examples are as follows:

Example 1.

Taxpayer A has owned and used his house as his principal residence since 1986. On January 31, 1998, A moves to another state. A rents his house to tenants from that date until April 18, 2000, when he sells it. A is eligible for the section 121 exclusion because he has owned and used the house as his principal residence for at least 2 of the 5 years preceding the sale.

........

AND FURTHER EVIDENCE THAT THE PHRASE  "ANY PORTION" used in Publication 523 literally means a multi-use property that is divided, allocated...

§ 1.121-1 Exclusion of gain from sale or exchange of a principal residence.

(e) Property used in PART as a principal residence -

(1) Allocation required. Section 121 will not apply to the gain allocable to any portion (separate from the dwelling unit) of property sold or exchanged with respect to which a taxpayer does not satisfy the use requirement. Thus, if a portion of the property was used for residential purposes and a portion of the property (separate from the dwelling unit) was used for non-residential purposes, only the gain allocable to the residential portion is excludable under section 121. No allocation is required if both the residential and non-residential portions of the property are within the same dwelling unit. However, section 121 does not apply to the gain allocable to the residential portion of the property to the extent provided by paragraph (d) of this section

(4) Examples. The provisions of this paragraph (e) are illustrated by the following examples:

Example 2 Non-residential use of property not within the dwelling unit and rental of the entire property.

(i) In 1998 Taxpayer B buys a property that includes a house, a barn, and 2 acres. B uses the house and 2 acres as her principal residence and the barn for an antiques business. In 2002, B moves out of the house and rents it to tenants. B sells the property in 2004, realizing a gain of $21,000. Between 1998 and 2004 B claims depreciation deductions of $4,800 attributable to the antiques business. Between 2002 and 2004 B claims depreciation deductions of $3,000 attributable to the house. B has no other section 1231 or capital gains or losses for 2004.

(ii) Because the portion of the property used in the antiques business is separate from the dwelling unit, the allocation rules under this paragraph (e) apply. B must allocate basis and amount realized between the portion of the property that she used as her principal residence and the portion of the property that she used for non-residential purposes. B determines that $4,000 of the gain is allocable to the non-residential portion of the property and that $17,000 of the gain is allocable to the portion of the property that she used as her principal residence.

(iii) B must recognize the $4,000 of gain allocable to the non-residential portion of the property (all of which is unrecaptured section 1250 gain within the meaning of section 1(h)). In addition, the section 121 exclusion does not apply to the gain allocable to the residential portion of the property to the extent of the depreciation adjustments attributable to the residential portion of the property for periods after May 6, 1997 ($3,000). Therefore, B may exclude $14,000 of the gain from the sale of the property.

One last thing that I forgot to mention, which I'm afraid will come to bite me in the *** and cause an audit is that when I sold the home, the closing agent had me sign something that clearly pertained to the qualifications of Section 121 (owned and resided for more than 2 of the past 5 years prior to sale), which I checked all the appropriate boxes that qualified me.... yet there was ONE box, that likely used the phrase, "Did you use any PORTION of the property for business or rental usage during the past 5 years?"  And I checked yes, which was upsetting to me at the time.  Obviously, I don't remember the exact word choice on the form, and was ignorant of what they were intending to ask...

The closing attorney told me that that form would be sent to the IRS, so now I'm afraid it could bite me in the ***.  Or is Worksheet 3 all that matters??  Would definitely hate to be audited and am now wondering if I should contact the closing attorney tomorrow....

All I can say after researching this is that the IRS needs to be abolished.  Ridiculous.

 Yes, sir!  I think you're correct that Worksheet 3 kinda clarifies things a bit more, especially with the obvious distinction between "Home" and "Business" gain/loss worksheets at the top and following thru.

OK... After reading and re-reading.... it appears that the bit from Pub 523 that I screenshotted is in reference to multi-use type properties only.  Specifically, that exception applies when "only a PORTION of the main home is used for business or rental usage".... "SPACE that was once used for business or rental purposes may be considered as residence SPACE at the time of sale.  SPACE formerly used for business is considered residence space if... You didn't earn any business or rental income from the SPACE in the year you sold your home." (this ultimately depends on what a "SPACE" is in the first place).... If your SPACE is considered as residence SPACE at the time of the sale, then your former business usage DOESN'T affect your gain/loss calculations, unless you took or were allowed to take depreciation for use of your home for business or rental purposes.  See Worksheet 2, line 5.... Business or rental SPACE that is separate from the living area affects your gain/loss calculations.  Examples of SPACE not within the living area include a first-floor storefront with an attached residence; a rented apartment in a duplex; or a working farm with a farmhouse on the property.  If you have used PART of the home (NOT WITHIN THE HOME'S LIVING AREA) for SOLELY business or rental purposes for more than 3 of the last 5 years, you need to make separate gain/loss calculations for the BUSINESS or residence PORTIONS.

Perhaps I am misunderstanding, however?!?

Worksheet 2 states:

If you used any PORTION of the property for business or rental purposes, go to "Business or Rental Use of Home".

It's my understanding, however... that I haven't used any PORTION of the property for business or rental purposes, because the home was not apportioned, allotted, divided, etc.  And that section, "Business or Rental Use of Home" appears to only apply to business or rental properties that were apportioned separately from the main home / living area.

The only real hangup I'm seeing is on Page 14, where it states:  "How Much Is Taxable?  Review of the Eligibility Test.  Generally, your home sale qualifies for the maximum exclusion, if all of the following conditions are true..... You didn't use the property as a vacation or rental home after 2008, or you didn't use a PORTION of the home, outside of the living area, for business or rental purposes."

This is the ONLY place where the terms PORTION and SPACE are not used in reference to the business or rental usage, but I'm thinking this ultimately has to do with depreciation recapture only and not overall capital gains.

Worksheet 3 shows that "Business or Rental Use of Home" is splitting up "Business" and "Home" versions of your gain/loss worksheet, further proving the point.  Then the home was always used as a residence from time of purchase up until the last 2.5 years or so, which is NOT to be included as "non-qualified use", so the "Home" version should have 0 non-use days by the days owned, making my non-residence factor a big fat 0%, which multiplied by the gain makes my non-qualified use gain another big fat $0, meaning that my gain that is eligible for exlusion is 100%!!!!

.......

I'm sorry if this is obvious to others here, but I'm literally trying to explain this to my tax preparer and she's trying to tell me, "Well, you did use any portion for rental use..."  And we're getting into a somewhat heated discussion over what really comes down to the legal meaning of PORTION, which she's apparently unaware of.  So if I'm off-base, I certainly apologize to you all and will have to apologize to her... otherwise, I'm going to have to make 100% certain that this interpretation is correct before I speak with her again.  And if necessary and she can't see it my way, I'll have to find a different tax preparer, I guess. . . .

Please see my last reply, regarding Publication 523...

Owned and lived in house for 2+ years before getting married, vacant for a few months, rented for  2 years, vacant for a month or 2... then sold.  I have not sold any other residence within 2 years of this sale.

EDIT:  And, I am NOT trying to DIY.  I have a Tax Professional that is including home sale under Capital Gains Schedule D *and* depreciation recapture under Form 4797, which is why I am here trying to understand what is actually correct.

Perhaps I spoke TOO SOON?!

The first link makes it appear as tho I'd only need to pay gains on depreciation paid while renting (however, that example has Alice living in the home for "22 months" prior to sale, which doesn't apply to my case!).  The second reference, Publication 523, gives 2 key bits of information that I've never seen anywhere else, and certainly not on Section 121 itself.  Namely, these 2 key bits...

(1) Even tho the ownership test is only required of 1 of 2 spouses, the residency test is required of BOTH spouses if filing jointly, which we were planning to do.... yet my wife did NOT live in the house during the past 5 years, which means that we'd have to file separately and will definitely complicate things quite a bit, but if it's worth it.... then, well, it's worth it!!

(2) This is the most obscure kicker that's pissing me off is WHERE ON EARTH the wording from this "Business or Rental Exclusion Calculation" section comes from... I met all the qualifications in Section 121 itself, but this following bit from Publication 523 states that "ALL of the following [must be] true:"

- You weren't using the space for business or rental property at the time you sold the property.

Technically, no... I did not sell it as a rental.  Renter left maybe 6 weeks prior to sale.  I cleaned it up, took pictures, posted it for sale, fully expecting to use Section 121, as recommended all over this forum, instead of doing a Section 1031 exchange, which I had originally planned to do before asking about the Section 121 law on this forum!!

- You didn't earn any business or rental income from the space in the year you sold your home

What in the actual EFFF?!  Why is this an exception?  It's not mentioned in Section 121 anywhere that I can see.... Or am I misunderstanding the meaning of what an exception is, or how this exception is applied?!?

- And you used the space as a residence space for 2 years out of the 5 years leading up to the sale.

YES!  Obviously!  This is *in* Section 121 and blatantly obvious.  It makes no sense that this would need to be REPEATED, considering this is the BIGGEST Eligibility Qualification for Section 121:  Ownership and Residence for 2 out of past 5 years.

But where does this second rule come from that the home cannot be used as a rental "in the year you sold your home"?  Is this the tax year only?  So if I use it as a rental until November or December 2021, then I sell the home in January 2022, is the Section 121 gain exclusion then valid because it wasn't "in the year"?  It doesn't say "in the year before"... and I know this is typically how tax stuff works, from Jan 1st to Dec 31st.   SO CONFUSING!!   ARBITRARY PUBLICATIONS ARE ARBITRARY!!  ARGGHH!!