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Business use of home

I started a discussion about this a few months ago, but have received some additional information that I'd like to run past the folks here. I indicated that my parents had sold a house on August 31, 2009. Until August 1999, part of the residence was used for business purposes and deductions for the use were made on their income taxes.

The responders here pointed me to Section 1250 and Form 4797.

However, I recently had a discussion with their tax professional and their view was because my parents had used the house exclusively as their primary residence (no business or rental) since 1999, they satisfied the 2-out-of-5 year rule and that nothing special needed to be done on this year's taxes relating to the sale. The gain was way under the $500,000 allowable exclusion.

Any help in resolving all of this would be appreciated.

Reply to
gindie
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The allowed or allowable depreciation since May 7, 1997 must be recaptured (added to gain on the 4797).

See page 16

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Reply to
Arthur Kamlet

The gain, being under the $500,000 allowable exclusion, is reported on Schedule D appropriately (add line showing Section 121 Exclusion and reduce by up to 500,000). The allowed or allowable depreciation is ALSO recaptured on form 4797 AS WELL in Part 1.

Unfortunately, there are things which must be done on the tax return to ensure that this does not come back to bit you.

Reply to
parrisbraeside

,

In other words, their so-called "professional" was wrong, based on what you relayed here.

Now, if they were not allowed to take any (or all of the) depreciation due to not having business income which it may offset (i.e. the income limitation), then it's possible that there's nothing to recapture. This would have been evidenced by their tax return including a form 8829 (for a sole proprietorship) or like statement (for an employee) for every year after the business activity ended showing a depreciation carryforward. The exclusion rule cannot exclude gain from depreciation recapture for depreciation actually taken or allowed (or which should have been taken, limitation permitting). With no prior depreciation taken (or should have been), as there's no current year gain on the sale recognized (after applying the exclusion), any depreciation carried forward will continue carrying forward.

Reply to
D. Stussy

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