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Business use of home - Sale of house

At the closing of the sale of their house today, each of my parents was given a form to fill out to determine whether the sale needed to be reported to the IRS. They were the normal questions (lived there 2 out of 5 years?, etc.), but they came to one that asked about business use of the home since 1997. My father used part of the basement in his freelance art business starting several years prior to 1997 until

1999, so we had to mark that box Yes. That led the closing agent to retrieve those forms and fill in another one to report the sale.

My father said he did take deductions for the basement office for the years he freelanced. I skimmed Publication 523 to determine what he needs to do, but I have questions:

1) I unserstand that he has to report the previous years' deduction amounts on Schedule D and pay Capital Gains tax on them, correct?

2) Does he have to go back to the first year he claimed the deduction, or only to 1997, which was the focus year of the form they started to fill out?

Reply to
gindie
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They should recapture Section 1250 (the building) depreciation for the home office allowed or allowable, after May 6, 1997. Use Form 4797 and since that is a deceptively easy form to get wrong, perhaps seek professional tax help.

Another reference:

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Reply to
Arthur Kamlet

Actually, Form 4797, which flows to Schedule D. This may be taxable at ordinary income rates.

Only to 1997. Depreciation taken prior to and including May 5, 1997 was exempted from recapture by Congress.

Note: If he had a profit for all years, and thus no Section 280A carryforward (tracked on Form 8829), then this is easy. However, if he has an unused carryforward, then technically, he has not been allowed the depreciation in prior years. If the recognized sale exceeds this accumulation, then it is allowed all in 2009. If the sale is less than the accumulation, then it continues, and Form 8829 wil be filed for all future years until it is used up, even if he's no longer in the business. Note that the net income from the sale of the home AFTER the exclusion is applied is what carries onto Form 8829, line 8. What Form 8829 then tells you is how much of the gain gets moved from Schedule D to Form 4797 (i.e. the depreciation deduction allowed); the gain on the sale itself doesn't change - but its allocation between ordinary tax rates and capital gains rates does.

Reply to
D. Stussy

Terminology details, minor correction to above:

They would only have ordinary income due to *recapture* if they had Sec.

1250 depreciation in *excess* of straight line (SL), in other words accelerated depreciation. Since SL depreciation would have been the case here, there is NO recapture of anything.

Since there is no recapture, we now have *unrecaptured* Sec. 1250 gain. This would be the lesser of the total gain or the total depreciation. Such gain will be taxed at a maximum rate of 25% instead of the lower LT capital gains rates.

-Mark Bole

Reply to
Mark Bole

Yup. Thanks.

Reply to
Arthur Kamlet

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