Capital gains from the sale of primary residence that is partilly rented out

[maxwang]

My spouse and I purchased a house as our primary residence, and we rented out two bedrooms (60%) of the house for 2 years. Then the tenants moved out, and  we lived in the house just by ourselves for 6 years. My question is: when we sell the house at the end of the 8 years, if we have $200k capital gain, how do I calculate the proration of the capital gain out of the full exclusion ($50,0000)?  Is there any DIFFERENCE between renting the WHOLE house out for the first two years versus ONLY rented out 60% of the house while still lived in it as a primary residence?

[Anonymous]

the exclusion is $500,000 when you file joint.  however the depreciation you took or should have taken when it was rented is subject to recapture.   use the home sale worksheet   

you owned and occupied the residence for 5 out of the 5 years before sale, therefore except for the depreciation recapture you're entitle to exclude the entire gain 

[maxwang]

I thought if I rented the house for a certain time period BEFORE I completely use it as primary residence, I always need to prorate the gain based on the ratio ( 2 divided by 8 years in this case) ?  My question here is whether it matters if it is a PARTIAL rent not rent of the whole house.  thanks,

[NCperson]

your understanding of the proration is incorrect.  as the residence was your primary home for at least 2 of the past 5 years, you are eligible for the entire exclusion.  Partial or full rental doesn't matter. 

your only issue is the depreciation recapture. 

[AmeliesUncle]

You seem to be changing your story.  Your prior question said you rented it for two years THEN you moved in as your Primary Residence.   Why is there a difference?

[jtax]

That's not what the original post said. It says rooms were rented out for two years. During those two years the OP lived in the property during those two years. The six years after that no portion of the property was rented.

[NCperson]

@maxwang - there does appear to be two different scenarios: 

1) the house was owned for 8 years.  For the 1st two years, part of the house was rented out. However, for the past 6 years you have lived in the home without renters.  

2) the house was owned for 8 years.  During some of these years, you had tenants living with you.   

regardless, if you review IRS publication 523,  I see no discussion of failing to meet the eligibility test because you had tenants for a period of time, even if those tenants were living with you for the months leading up to the sale.

there is the issue of the depreciation recapture tax but that is separate from the capital gains exclusion test.

[maxwang]

I asked two scenarios for future tax planning. I would like to know whether is any DIFFERENCE between these two scenarios for proration of maximum exclusion of capital gain from sell my primary residence house:

1. I bought the house, and rented the whole house out for two years, then lived in there for six years before I sell the house.

2. I bought the house, and rented two bedrooms out but still lived in it for two years. Then the tenants moved out, I lived in the house for six years before I sell the house.

[NCperson]

suggest googling IRS Publication 523 and reading it! 

proration is simply not an issue - see the publication

even if you bought the house today, got two tenants TODAY who lived with you for two years in your principle residence and at the end of the two years, you sold the house, you'd still be eligible for the $250,000 capital gains exclusion and there would be no proration. 

As stated above, the only issue would be the depreciation recapture tax as you were presumably depreciating the property and reporting the tenant rent as income

[Hal_Al]

Yes, there is a difference in the two scenarios.

Q1. I bought the house, and rented the whole house out for two years, then lived in there for six years before I sell the house.

A 1. You have to prorate the gain. 2/8 (25%) of the gain is taxable plus depreciation recapture of the depreciation taken or should have been taken ("allowed or allowable").

Q. 2. I bought the house, and rented two bedrooms out but still lived in it for two years. Then the tenants moved out, I lived in the house for six years before I sell the house.

A. 2.  The  entire gain is excludable because it was your residence for the entire time. You must recapture any depreciation actually claimed, but you do not need to claim recapture of "allowable" depreciation, not taken. 

[maxwang]

@Hal_Al  Can you point out the tax law on the "partial rental does not change primary residence status"?

thanks,

[JohnB5677]

 IRS publication 523 states in the section under Business or Rental Use of Home, "If the space you used for business of rental purposes was within the living area of the home, then your usage doesn't affect your gain or loss calculations.

Examples of spaces within the living area include a rented spare bedroom." I am correct to understand that renting out rooms in my house doesn't affect my eligibility for the exclusion?

See page 11 of:  IRS Pub 523

[yangyingtina]

My understanding of the cited 523 means if you have capital gain of 200K by the time you sell it, it is still 200K, regardless if you partially rent it or not. But the question is about how much of the 200K got excluded when partially renting out the house in the first 2 years. Is there any publication or tax code to explain this?

[JohnB5677]

The rental usage of the house doesn't affect your gain or loss calculations.  As Married Filing Jointly you can exclude up to $500,000 in gain against the sale of the home.  If you exceed that amount,  you will pay a tax.