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Depreciation Recapture

I'd appreciate some quick information on the mechanics of how depreciation recapture will be used in a §121 exclusion situation.

I have a person who owns a home that already has a carryover basis from a prior rental property. The owner lives there with her adult child, who pays rent. And the owner is currently depreciating what I assume is the portion of the property rented to her child.

They are thinking of having the child buy, say, a one-half interest in the property, making a fairly good sized down payment, and mortgage payments on the outstanding balance.

I know this should be easy, but I don't do returns, and I'd really like to understand how this will shake out.

Thanks.

Reply to
Stuart A. Bronstein
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The child is buying a 50% share of a part-rental, part-personal property. Gain that cannot be excluded can be recognized on an installment basis since there will be seller financing. Not sure what you mean by "carryover basis from a prior rental property" - was this a like-kind exchange (rental) that became a primary residence?

Section 1250 gain that was not previously recaptured will be taxed at maximum 25% rate.

-Mark Bole

Reply to
Mark Bole

Sorry, yes. Mom had a rental that she did a 1031 exchange on when she purchased the current property.

So if the child gives a down payment of, say, $100,000, past depreciation will be recaptured before the §121 exemption is determined? Or is there some sort of allocation between them?

Reply to
Stuart A. Bronstein

And then she converted half of it to a personal residence? I'd expect to need a few worksheets to figure this all out. If it was rented below FMV to a family member, that constitutes personal use on the rental activity.

Without looking it up, I recall that unrecaptured §1250 gain is all taxable in the year of sale, regardless of installment agreement. I don't think the down payment has anything to do with it. If you can show that depreciation allowed was less than that allowable, you can use the amount allowed.

Also, for a home acquired via a like-kind exchange, the §121 exclusion cannot be claimed if sold within five years of the exchange. There might also be post-2008 periods of non-qualified use for the rental portion.

Pub 523 "Selling Your Home" has a lot of good info including "Business Use or Rental of Home". Depends if the rental portion was separate from or part of the main home.

-Mark Bole

Reply to
Mark Bole

Thanks, I'd forgotten that. My guess is that the amount being paid now is in the FMV ballpark. But it won't be anymore if Mom moves out and the child takes over the whole house for the same price.

That's what I was afraid of. And that's what §453 says. The statute also says that installment treatment won't apply to transactions between related persons unless it's shown that the transaction didn't have avoidance of income taxes as a principal purpose. But since that is precisely the purpose of the installment sale in general, I suppose that will be a pretty high hurdle.

It's been more than five years. The big problem is accelerating all recapture into the first year.

Thanks! That's given me all the information I needed (but didn't necessarily want to have).

Reply to
Stuart A. Bronstein

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