Message Board › Sale of home that has been “partially” rented in the past
- This topic has 10 replies, 5 voices, and was last updated 19 hours, 36 minutes ago by Ian Alper.
September 14, 2021 at 2:22 pm #314724Bobbi Urbanec StricklandParticipant
I have a client that rented 25% of her personal residence to her daughter.
She sold her home in 2020 BUT DID NOT RENT IT OUT in 2020.
Do I still have to allocate the capital gain to personal residence AND rental?
September 15, 2021 at 4:10 pm #314799Maria KuParticipant
Make sure it was indeed a rental: When one rents to a related party, it must be at FMV, AND it must be that renters primary residence, for you to show it as a rental.
1250 recapture would need to be done anyway.
Look at the 25% of the property as a separate property, and do allocation of “qualified” use versus “non-qualified” use, to determine how much of the gain gets excluded.
September 15, 2021 at 4:48 pm #314802Ian AlperParticipant
I have often wondered about this. If the room rental was done properly and at FMV, and there is not a separate structure being rented but an actual room in the home, should it be treated differently than an office in home on the sale?
September 15, 2021 at 5:31 pm #314805Mark BoleParticipant
If the rental is not a separate dwelling unit (bed, bath, and kitchen facility) then it is a rental with personal use and is subject to so-called “vacation home” rules. The “problem” for many in this situation is that the sub-rental usually does not have its own separate kitchen facility.
“Look at the 25% of the property as a separate property,”
This only works if the 25% of the property is a separate dwelling unit (e.g. a duplex or similar).
September 15, 2021 at 5:49 pm #314809Ian AlperParticipant
And I thought I was the only one who followed the vacation home rules for a room rental! They tend to be quite confusing – I do with they would come up with an easier set of rules to follow in this common situation.
Mark, thanks for your input. What is the problem of no separate kitchen?
September 16, 2021 at 8:53 am #314818Mark BoleParticipant
Without a separate kitchen, there is no dwelling unit. While I won’t try to speak for the legislators, it is clear to me that if you are renting out just a room (whether with separate bath or not), there will be both rental and personal use of the kitchen.
September 17, 2021 at 9:32 am #314959Anonymous
Sorry, not sure if I should open another new thread for my question. I am wondering : What if a Airbnb business ( Multi family -4 plex) and owner move in mid year 2020 as residence and still have airbnb activities. How does the Capital gain calculated if owner later sell the property? Thanks in advance for any response.
September 17, 2021 at 11:17 am #314981Mark BoleParticipant
The capital gain part is calculated as usual – gross proceeds less expense of sale less adjusted basis = net cap gain.
Maybe you are thinking of the Sec 121 exclusion? Even if they meet the 2-of-5-year ownership and use test, they have to pro rate the exclusion based on period of non-qualified use prior to use as a primary residence, see the IRS pub for details.
And Sec 1250 gain (gain due to regular depreciation allowed or allowable) is not eligible for Sec 121 exclusion.
September 17, 2021 at 4:13 pm #315021Ian AlperParticipant
Mark – “there will be both rental and personal use of the kitchen”. My understanding was that the business use percentage would just be the area used exclusively by the tenant. I am still wondering if it should be treated the same as an office in home deduction where there would be no 121 implications other than to pay tax on prior depreciation.
How do you handle room rentals where kitchen is shared? When I first started practicing I was surprised how complicated such a common situation was – tax wise. I asked a CPA who replied “you have a client that actually reports that?!”. Not much help. IRS pubs are not very clear.
September 18, 2021 at 2:46 pm #315064Mark BoleParticipant
The topic of renting part of a home used as a primary residence, when the part rented is not a separate dwelling unit, has been discussed ad nauseum in many forums, I’m sure.
Let’s face it, in many cases, such as a tenant who leases a two bedroom apartment and then gets a roommate who pays half the rent and other expense, it is simply considered expense sharing, and not reportable as an activity on a tax return. Just like if I pay for a group meal and then get reimbursed by the other diners for their share, I am not running a food service business.
One can I’m sure go the the IRS pub on rentals an cherry pick any number of sentences and examples there to support any number of positions. They give examples that involve renting just a room, but they don’t follow through with all the tax ramifications in one place. In addition to defining a “dwelling unit”, they pub also goes into detail about what constitutes a “home”, a not-for-profit rental, a day of personal use, and so on. But they never put it all together in a consolidated example. And as we know, IRS pubs are not authoritative.
IMO it comes down to two “edge” cases that would require extra due diligence on the part of the tax preparer.
- Suppose someone has owned and lived in a house for 30 years or more, so that their prop tax is very low, adjusted basis is very low, and mortgage is non-existent. Then they rent out a room at market rate, maybe $1-2K/month. I’m pretty sure this person has taxable net rental income and it should be reported on a Schedule E.
- Suppose conversely that someone has a very expensive house they recently purchased, mortgaged to the hilt, and yet their overall AGI is below the passive-loss-with-active-participation threshold, and they also take the standard deduction. They too rent out a room at market rate, but want to take full deductions against that income for depreciation, prop tax, mortgage interest, etc, which leads to a deductible loss against ordinary income. I’m pretty sure this person should be subject to the so-called “vacation home” rules and have their deductions limited to no more than their rental income, so no net loss.
September 20, 2021 at 4:53 pm #315327Ian AlperParticipant
I am posting a link to another chat room that has an interesting/related discussion. If this is not allowed please let me know and I will delete it.
At the end of the discussion is a link to an IRS Pub -(I know, just a Pub…P