Sale of Rental Property

Could someone please help me with this tax question. I have owned a three family home and rented out two apartments which represents approximately 1,800 sq ft and I lived in

2,700 for two years. I depreciated 2/3 of the value of the building for the two preceding tax years. When I prepared my taxes I completed a form 4797 and showed the gain relating to the rental portion but I also showed a section 121 exclusion for the entire amount since I used the building as my primary residence. A friend of mine is about to sell a similar building like mine and called to ask me about the tax treatment. I did some research on-line and now I am not sure I applied the correct tax treatment. Here are my questions: Was I correct? If not, why didn't the IRS discover the error and requested that I correct the tax return? If it is an error do I still have to correct it given the fact that the return was filed three years ago. Does the statute of limitation apply, if incorrect? Thanks all.

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Reply to
amanisarealty
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It doesn't sound right. Why on Earth did you depreciate and/or expense out 2/3 of the building when it seems that

40% was rental and 60% was personal? Since you took depreciation, some of the gains from the sale are taxable.

There's no room in the budget for a psychic. They'll probably catch up to you after they see there is a sale of rental property, in a year or two after the year of sale. It's also likely that they'll miss it entirely.

It depends. How much was the taxable gain amount anyway? If it's greater than 25% of your total income, then they have till the end of time to audit you on the issue. Otherwise, it's generally three years after the later of the due date or the processing date of the return. In short, you're getting close to being safe on the matter.

But, don't guide your friend through that same loop of audit roulette. Have them seek proper tax advice from an CPA or EA.

-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net

Reply to
Paul Thomas, CPA

are you sure you stated the above correctly? Was the total sq. footage 2700, and you rented out 1800 and lived in the remaining 900? I.E. rented out 2/3? or was the rentals 1800 sq. ft and you lived in 2700 sq. ft., for a total of 4500 sq. ft.? I.E rented out 40%?

Reply to
Gil Faver

You rented out 40% of your property, but depreciated 67%? No, that's not correct. You used 60% as your primary residence, but excluded 100% from capital gains? No, that's not correct, either. This should have been treated as two separate sales, one for the rental portion, one for the primary residence portion.

the tax return?

The IRS cannot check or catch everything. But they may.........

years ago. Does the statute of

A 2003 tax return can be amended by April 17, 2007. A return for 2004 or 2005 has more time to file an amended return. You need to see a professional preparer.

Reply to
R. Pile

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