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sale of residence partially used as a rental

December 09, 2016 • Robert Sternshein • Log In to Post Comments

Taxpayer purchased a home in January 2003.  He and his wife resided in the property since this date until it was sold in October 2016.  However, 80% of the Residence was rented from January 2003 until June 2014.  It was used 100% as their residence from June 2014 until sold in October 2016.  This property was only one structure.  ie. Everyone lived in the same structure


Qualifying Dates - Jan 2003 thru 2008 and July 2014 thru October 2016 - about 8.5 years

Non qualifying Dates - 2009 through June 2014 - 5.5 years

Can I allocate the non qualifying dates further between a rental and a residence proportionately ie only 20% of the property was used as a residence from  2009 until  June 2014 and 80% of the 5.5 years were non qualifying.  Another words: adjust the fraction accordingly ie  qualified use is 20% of 5.5 years and non qualified use is 80% of 5.5 years.


Can I factor in the personal \ rental use as indicated above or Is there any other way to adjust for this ?

Thank you,






I think you are trying to allocate the gain from the sale of property for purposes of IRC section 121(b)(5) to reduce the home sale exclusion for nonqualified use.

IRC section 121(b)(5) requires you to reduce the exclusion amounts ($250k/$500k) by allocating qualifying and nonqualifying use.  For example, a taxpayer meets the ownership and use tests of IRC 121 (the 2 out of 5 year rules) on a property they owned 20 years, but rented the property for 6 of those years, then you would reduce your exclusion by 30% (6 years nonqualifying use / 20 years total ownership).

However, Treas. Regs. section 1.121-1(e) states: 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, Tras. Regs. section 1.121-1(e) states that IRC section 121 does not apply to the gain allocable to the residential portion of the property to the extent that the gain is attributable to depreciation adjustments.



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