sale of primary residence which used to be a rental home


N

nat

We purchased a home in California in 1995 for $250k mainly for a rental
income. I have rented it out since 1995. Now the house is vacant. We are
thinking of moving into this rental home and converting it to our primary
residence. Then sell it after two years. We will be spending 75k for
remodeling. It may sell for 800k after two years. Do we get the full 500k of
capital gain exemption? I understand that we will have to recapture the
depreciation.
A friend told me that I can only get a pro-rated exemption. If I owned the
house for 20 years and I only lived in it for 2 years than I can only get
tenth of the exemption (50k).
I am all confused. I always thought that all I have to do it make it a primary
residence for two years to get the 500k exemption.

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A

Arthur Kamlet

We purchased a home in California in 1995 for $250k mainly for a rental
income. I have rented it out since 1995. Now the house is vacant. We are
thinking of moving into this rental home and converting it to our primary
residence. Then sell it after two years. We will be spending 75k for
remodeling. It may sell for 800k after two years. Do we get the full 500k of
capital gain exemption? I understand that we will have to recapture the
depreciation.
A friend told me that I can only get a pro-rated exemption. If I owned the
house for 20 years and I only lived in it for 2 years than I can only get
tenth of the exemption (50k).
I am all confused. I always thought that all I have to do it make it a primary
residence for two years to get the 500k exemption.
More complicated than that.

See the worksheet on page 37 of http://www.irs.gov/pub/irs-pdf/p523.pdf

The period of non-qualified use after 12/31/08 creates the need to
pro rate the exclusion amount, using Worksheet 2 of the referenced Pub.
 
N

nat

responding to
http://www.beansmart.com/taxes/sale-of-primary-residence-which-used-to-be-a-rental-home-37289-.htm
kamlet wrote:

,


More complicated than that.

See the worksheet on page 37 of http://www.irs.gov/pub/irs-pdf/p523.pdf

The period of non-qualified use after 12/31/08 creates the need to
pro rate the exclusion amount, using Worksheet 2 of the referenced Pub.
Thanks for your help.

On Page 37, there is a Worksheet 2 and on Page 38, there is a Worksheet 3.
Friend of mine told me that I need to use Worksheet 3 and not 2. What do you
think?

thanks



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P

Phil Marti

On Page 37 [of Pub 523], there is a Worksheet 2 and on Page 38, there is a Worksheet 3. Friend of mine told me that I need to use Worksheet 3 and not 2.
Your friend is wrong. Your situation (depreciation and nonqualifed use after 2008) is covered in Worksheet 2. See lines 6-10 of the worksheet.

Phil Marti
VITA/TCE Volunteer
Clarksburg, MD
 

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