Sale of House Used as Partial Rental

[Rick]

For the last seven years, I rented a portion of my house out (40%) and
reported rental income and expenses including depreciation on Schedule E. I
also lived in the house. This year (2016) I sold the house and am now
struggling to understand how to report the sale. The profit on the sale of
the house was only about $75,000 (below the exclusion amount), but I
understand I have to pay tax on the depreciation I claimed over the years I
was filing Schedule E.

Here is the question. During the years I was filing Schedule E, I always
divided the mortgage and property taxes using the ratio that 40% of the
expenses would go on Schedule E and 60% would go on Schedule A. Do I have
to do the same thing now in reporting the house sale? In other words, do I
have to treat it as two sales - one for 60% with no tax implications and one
for 40% which would have the information for the depreciation recapture? Or
should I just report it as one sale and record the correct amount of the
total depreciation there?

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[Arthur Rubin]

On Friday, January 13, 2017 at 6:25:45 PM UTC-8, Rick wrote:
> For the last seven years, I rented a portion of my house out (40%) and
> reported rental income and expenses including depreciation on Schedule E. I
> also lived in the house. This year (2016) I sold the house and am now
> struggling to understand how to report the sale. The profit on the sale of
> the house was only about $75,000 (below the exclusion amount), but I
> understand I have to pay tax on the depreciation I claimed over the years I
> was filing Schedule E.
>
> Here is the question. During the years I was filing Schedule E, I always
> divided the mortgage and property taxes using the ratio that 40% of the
> expenses would go on Schedule E and 60% would go on Schedule A. Do I have
> to do the same thing now in reporting the house sale? In other words, do I
> have to treat it as two sales - one for 60% with no tax implications and one
> for 40% which would have the information for the depreciation recapture? Or
> should I just report it as one sale and record the correct amount of the
> total depreciation there?

Two sales seems correct. If you had stopped the rental and used the house as your primary residency for two years before sale, you would then have one sale with restrictions on the exclusion.

--
Arthur L. Rubin, CRTP, AFSP, Brea, CA

[MTW]

On Friday, January 13, 2017 at 6:25:45 PM UTC-8, Rick wrote:

> For the last seven years, I rented a portion of my house out (40%) and
> reported rental income and expenses including depreciation on Schedule E. I
> also lived in the house. This year (2016) I sold the house and am now
> struggling to understand how to report the sale. The profit on the sale of
> the house was only about $75,000 (below the exclusion amount), but I
> understand I have to pay tax on the depreciation I claimed over the years I
> was filing Schedule E.
>
> Here is the question. During the years I was filing Schedule E, I always
> divided the mortgage and property taxes using the ratio that 40% of the
> expenses would go on Schedule E and 60% would go on Schedule A. Do I have
> to do the same thing now in reporting the house sale? In other words, do I
> have to treat it as two sales - one for 60% with no tax implications and one
> for 40% which would have the information for the depreciation recapture? Or
> should I just report it as one sale and record the correct amount of the
> total depreciation there?

If the rental portion was a SEPARATE DWELLING UNIT, meaning that it had its own kitchen, toilet and sleeping facilities, and preferably its own separate entry, then I would report it as two sales with the sales proceeds allocated 60% personal, 40% rental. It sounds like this would result in a taxable gain on the rental portion in excess of just the depreciation.

But if the rental portion was simply a couple of rooms within YOUR dwelling unit, with kitchen and other facilities shared, then I would report it as one sale of a personal residence and IIRC probably only the depreciation amount would be taxable. But note, if this was the case, your handling of this over the years should have been subject to the IRC 280A limitations (so-called "vacation home" rules).

MTW