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QPRI, COD - bedroom rental

COD = cancellation of debt QPRI = qualified principal residence indebtedness

Facts:

Taxpayer has a principal residence (for QPRI exclusion of COD income, does not have to meet the same 2-of-5 year test that §121 exclusion requires).

Taxpayer has been renting out a bedroom, say 20% of the property by area, at FRV (fair rental value) to a tenant for several years. It is a single dwelling unit, so it is mixed-use property, and no depreciation has ever been allowable.

Mortgage lender has offered to modify loan balance, since property is underwater and taxpayer is not making monthly payments.

Question:

For purposes of QPRI exclusion of COD income, does the entire property qualify, or does it have to be split (allocated) into two "virtual" properties, one of which is a pure principal residence (80%), the other which is a principal residence converted to a rental (20%) (and thus not eligible for QPRI exclusion)?

Further:

This seems somewhat similar to an OIH (office in home) when selling the principal residence for §121 exclusion purposes. Other discussion threads at another web board indicate that maybe the OIH does not preclude the §121 exclusion, so maybe it (and by comparison, a sub-rental) also does not preclude the QPRI exclusion?

In any case, since the taxpayer will still own the property after the loan modification, they will have to reduce their basis accordingly.

Reply to
Mark Bole
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Without doing any research, I think that the COD income has to be split according to the area as you point out as well as time. Say the house was owned for 5 years and 20% of it was rented out for 1 year, then 1/5 of 20% should be non qualified canceled debt (I taxable in Line 21 Other).

Section 108

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does notappear to address the exact issue you talk about.

Reply to
removeps-groups

I take the position that you don't allocate anything to the rental as long as at the time you incurred the debt, it was acquisition debt for your principal residence (there was no rental). This is consistent with the definition in Sec. 163(h) and the wording used by the IRS in Pub

4681. I differentiate that from the case where at the time you purchased the property you used it as your main home and partially as a rental. In this instance, you do have rental property for which the exclusion would not apply. Some part of the debt would have to be allocated to the rental.
Reply to
Alan

I concur, but for a slightly different reason: The overall property was subject to IRC 280A limits and not treated as two separate units. Compare this to an allocation for a duplex - 2 separate units and thus a rental unit not subject to 280A limits. Perhaps "Alan" has the same thinking but expressed it differently.

Reply to
D. Stussy

Office in home, without doubt, does not preclude use of Section 121. The only taxable gain is the amount equal to depreciation taken on the office in home. In my opinion, the rules would be the same for a bedroom rented to a boarder with the possible exception that taxable gain would equal depreciation allowed or allowable instead of just allowed.

Reply to
Bill Brown

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