Capital Gains Tax Basis

[alexa]

Capital Gains Tax Basis

Let's say a person buys a home for $100k to live in, and lives in it, for say, 10 years. Then she or he decides to move elsewhere and turn the home into a rental instead of selling it.

The fair market value of the rental home when it becomes a rental property is $150K.

Then she rents it for say 10 years and then decides to sell it. The FMV is now $250k.

What is this person's capital gain?
Is it from the time the property is turned into a rental ie $150K?

Would very much appreciate your help on this.

Thank you.

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[Stuart O. Bronstein]

alexa <ginafi...@gmail.com> wrote:

> Capital Gains Tax Basis
>
> Let's say a person buys a home for $100k to live in, and lives in
> it, for say, 10 years. Then she or he decides to move elsewhere
> and turn the home into a rental instead of selling it.
>
> The fair market value of the rental home when it becomes a rental
> property is $150K.
>
> Then she rents it for say 10 years and then decides to sell it.
> The FMV is now $250k.
>
> What is this person's capital gain?
> Is it from the time the property is turned into a rental ie $150K?

The basis is essentially the price paid for property, plus the cost
of capital improvements over time, less any depreciation that was (or
could have been) deducted.

In this case the basis starts out at 100,000. Depreciation depends
on several factors, but could be about $2500 per year. So after ten
years the basis is reduced to $75,000, which is subtracted from the
$150,000 sales price, leaving a $75,000 capital gain.

If the owner moves back into it for ten years and then sells it,
capital gain up to the first $250,000 ($500,000 for a married couple)
is tax free.

--
Stu
http://DownToEarthLawyer.com

[lotax]

When Stu wrote in his next-to-last paragraph "...which is subtracted from the
$150,000 sales price, leaving a $75,000 capital gain," I'm pretty sure he meant to write "...which is subtracted from the $250,000 sales price, leaving a taxable gain of $175,000."

That gain will be a section 1231 gain, and part of the gain will also be unrecaptured section 1250 gain, which is a topic waaaay beyond the scope of this thread.

[Stuart O. Bronstein]

lotax <lo...@hotmail.com> wrote:

> When Stu wrote in his next-to-last paragraph "...which is
> subtracted from the $150,000 sales price, leaving a $75,000
> capital gain," I'm pretty sure he meant to write "...which is
> subtracted from the $250,000 sales price, leaving a taxable gain
> of $175,000."

Well, I would have meant that if I'd noticed the sale would be when the
value was $250,000 instead of $150,000. Thanks for catching that.

> That gain will be a section 1231 gain, and part of the gain will
> also be unrecaptured section 1250 gain, which is a topic waaaay
> beyond the scope of this thread.


--

Stu
http://DownToEarthLawyer.com

[maria...@gmail.com]

RE: "If the owner moves back into it for ten years and then sells it,

capital gain up to the first $250,000 ($500,000 for a married couple)
is tax free. "

This is NOT correct. The entire period of ownership will be analyzed for "qualified" versus "non-qualified" use periods. Nonqualified use is any period after 2008 during which neither taxpayer nor spouse (or former spouse) used the property as a main home. The portion of the gain attributable to non-qualified period will never qualify for the gain exclusion, no matter how long you live in the house after the rental use.

Maria U. Ku, CPA
Oakland, CA

[Stuart O. Bronstein]

maria...@gmail.com wrote:

> RE: "If the owner moves back into it for ten years and then sells
> it, capital gain up to the first $250,000 ($500,000 for a married
> couple) is tax free. "
>
> This is NOT correct. The entire period of ownership will be
> analyzed for "qualified" versus "non-qualified" use periods.
> Nonqualified use is any period after 2008 during which neither
> taxpayer nor spouse (or former spouse) used the property as a main
> home. The portion of the gain attributable to non-qualified period
> will never qualify for the gain exclusion, no matter how long you
> live in the house after the rental use.

I meant to write "two" years instead of "ten." Under Section 121, as
long as the property was used as the principal residence if the owner
(s) for two years out of the previous five (which will necessarily be
after 2008 since that was more than five years ago), it will qualify
for the exemption.

But you're right, section 121 was changed by the new tax act. If the
property was not used as a principal residence from the beginning,
the "unqualified" use time will proportionately reduce the amount of
the exemption. But my understanding is that, if the home started out
as a principal residence, subsequent unqualified use won't count
against the exemption.

In OP's case they used the property as their principal residence for
the first ten years of ownership, and converted it to a rental
afterwards. It doesn't appear that any apportionment or reduction in
the exemption would be warranted if they moved back in to qualify for
it.


--
Stu
http://DownToEarthLawyer.com

[Taxed and Spent]

On 1/12/2018 6:13 PM, maria...@gmail.com wrote:
> RE: "If the owner moves back into it for ten years and then sells it,
> capital gain up to the first $250,000 ($500,000 for a married couple)
> is tax free. "
>
> This is NOT correct. The entire period of ownership will be analyzed for "qualified" versus "non-qualified" use periods. Nonqualified use is any period after 2008 during which neither taxpayer nor spouse (or former spouse) used the property as a main home. The portion of the gain attributable to non-qualified period will never qualify for the gain exclusion, no matter how long you live in the house after the rental use.
>
> Maria U. Ku, CPA
> Oakland, CA
>

There are certain exceptions, most notably:


Exceptions: The term “period of nonqualified use” does not include any
portion of the 5-year period described in subsection (a) which is after
the last date that such property is used as the principal residence of
the taxpayer or the taxpayer’s spouse

[Taxed and Spent]

I don't think Section 121 was changed by the new tax law.

And the conclusion stated in your last sentence is incorrect.

[lotax]

And no one has yet pointed out that $75,000 of gain (when the house is sold, after being used a principal residence for the second period of personal use) attributable to the depreciation taken on the house while it was a rental will not qualify for the $250,000 exclusion. Anybody disagree with that?

[Taxed and Spent]

On 1/15/2018 6:29 AM, lotax wrote:
> And no one has yet pointed out that $75,000 of gain (when the house is sold, after being used a principal residence for the second period of personal use) attributable to the depreciation taken on the house while it was a rental will not qualify for the $250,000 exclusion. Anybody disagree with that?
>

Maria pointed it out, without doing the math.

I don't disagree with your math, other than it ignores depreciation that
has been or could have been taken, as well as any improvements. And the
fact that OP does not say she moved back in and used it as her principal
residence after the rental period. Or, if she did, how long that
unstated period was, which would affect the pro ratio numbers.


I think the answer to OP's question is that then entire gain is taxable,
and depreciation, and improvements must be taken into account. And
possible depreciation recapture and unrealized 1250 gain.

OP makes no mention of a second period of principal residency. Stu
added that. And the thread drift was complete.

[Stuart O. Bronstein]

Taxed and Spent <nospam...@nonospam.com> wrote:

> OP makes no mention of a second period of principal residency. Stu
> added that. And the thread drift was complete.

I didn't say there had been a second period of residency. I suggested
that as a way she could save some taxes.

--
Stu
http://DownToEarthLawyer.com

[Taxed and Spent]

On 1/15/2018 10:41 AM, Stuart O. Bronstein wrote:
> Taxed and Spent <nospam...@nonospam.com> wrote:
>
>> OP makes no mention of a second period of principal residency. Stu
>> added that. And the thread drift was complete.
>
> I didn't say there had been a second period of residency. I suggested
> that as a way she could save some taxes.
>

Yes. But then everyone else assumed your suggestion were the facts.

[lotax]

I would like to point out that the denial of the Section 121 exclusion for any gain allocable to periods of nonqualified use on the one hand, and the denial of the Section 121 exclusion for gain attributable to depreciation on the other hand, are not the same thing.

They are two entirely different exceptions to the Section 121 exclusion, and they are applied based on quite different things. And they both might easily apply to the same scenario.