QUESTION DETAIL
Related User
Votes
My client, Polly, and her husband have owned a house they have rented since April 1995. The house has two separate living quarters with separate entrances. It is in a resort area where Polly works so she stays in one of the living areas most of the time and they rent out the other half. They also own a ranch about 75 miles away from the house. The husband works the ranch and lives in the house on the ranch all the time. They are planning on selling the house that is in the resort area in which half the house is rented and half Polly stays in. They will not sell for a few years. Here are the questions:
- Even though only half the house was rented, their accountant depreciated the whole house. They have not filed for 2013, should they correct this now? They have already depreciated over half of the depreciable basis.
- Can Polly claim half the home as her personal residence since she lived in it and worked in the town in which it is located. She receives her mail at this location but her voter's registration is where the farm is.
- Can Polly and her husband move into the rental for two years and claim it as their personal residence? Does the depreciation that has been taken just reduce the basis or does it "recapture" as ordinary income?
- If they claim this house as their personal residence will they still have to prorate the capital gain into gain eligible for the exclusion and gain allocated to non qualified use?
- The house was purchased in 1995 for approximately $80,000 and $48,669 has been depreciated. It is now worth approximately $600,000 so they are looking for ways to minimize the tax they will pay.
ANSWER
The BIDaWIZ Team's Answer:
Yes, they should correct the depreciation as a portion of the house is considered a personal residence for tax purposes and the other part is for rental as noted in Internal Revenue Code Section 167(a) & IRS Publication 946.
Yes, half the home can be considered her personal residence as that is where she is domiciled. They can move into the home and convert it fully to a personal residence.
The depreciable basis recaptures when the couple sells the home as noted in IRC Section 1250. Please note that if the property was converted to a rental, the couple could do a 1031 exchange to defer the gain and recapture -- however, that may not be ideal for this couple as it would mean they would need to use the proceeds to purchase another rental.
The capital gains exclusion would be prorated between qualified and non-qualified use. They could avoid this by living in the home for 5 years.
