Partial Airbnb and principle residences capital gain tax exemption

[x_m_z]

My wife and I bought a house and we are planning to rent partial of house through Airbnb. However, we were asked by our city to setup an LLC and then rent partial house through Airbnb. That mean although my wife and I still own the whole house, but the LLC is running the partial house renting business in Airbnb.

Does this (LLC running Airbnb renting) will affect the $500,000 principle residences capital gain tax exemption in the future when we sell it?

Thank you.

[Mike9241 · Accepted solution]

When you have a house that is part personal residence, and part rental property some parts of the tax code become complex. You will have to divide all the expenses (mortgage, property tax, insurance) and split it between the two uses. You will also have to take that rental portion of the property and depreciation it. You will need to determine the value of the property before the split and then determine the value of the rental portion at the time of the split. From then on, you will follow the IRS regulations for depreciation of the rental portion until you either convert it back to non-rental or sell the property.

When the property is sold the portion of the sales price will be associated with the rental property, and you will need to determine if the rental property is sold for a profit or a loss. You will also have to recapture the depreciation. It is possible that one portion of the property could show a loss, and the other part of the property a gain depending on house prices over the decades.

You can expect that AirBnB will collect tax info and send it to the IRS

since it seems you're saying a portion will not be used as your personal residence it won't qualify for the home sale exclusion unless you stop renting and make it part of your principal residence.  Then special rules apply to the home sale exclusion on this part of your home. 

since tax rules change over time, consult a tax pro as far in advance of any sale as soon as possible. 

also, consult with your insurance agent before starting the rental. it is possible you may need an insurance rider to cover the BNB part.

[x_m_z]

Thank you for your time, however, your post still did not help for my question.... 

I always report the rental income, cost/expense, and take the depreciation for the rental portion of the house. I also understand that there is a "Depreciation recapture" when I sell the house. However, the question I need help is below:

1. My wife and I purchased the house 

2. I setup an LLC to manage the renting (50% of the house) on Airbnb -- but my wife and I own 100% the house and living in the house, (LLC does not own any portion of the house)

3. Report all income and cost and expense, and take depreciation for half of the house - of cause. 

4. After few years, sell the whole house with a total $500,000 capital gain after consider Depreciation recapture for the half of the house.

5. Since the LLC was running Airbnb for half of the house, can we still get the $500,000 capital gain tax exemption when we sell the house?

[Carl]

Does this (LLC running Airbnb renting) will affect the $500,000 principle residences capital gain tax exemption in the future when we sell it?

Yes, it will affect any future exclusion when you sell the house, and it will not be in your favor. For your situation this *will* be complex. It would not be conducive to cover all the possible complexities in this text based user-to-user forum either.   I would highly recommend you seek information/knowledge on all your options and possible outcomes from a tax professional in your local area. This would be especially important if your state also taxes personal income.

[x_m_z]

I just want to get help on the Federal tax, since my state does not have personal income tax.

Would appreciate if anyone could help.

Thanks.

[Carl]

However, the question I need help is below:

1. My wife and I purchased the house 

2. I setup an LLC to manage the renting (50% of the house) on Airbnb -- but my wife and I own 100% the house and living in the house, (LLC does not own any portion of the house)

3. Report all income and cost and expense, and take depreciation for half of the house - of cause. 

4. After few years, sell the whole house with a total $500,000 capital gain after consider Depreciation recapture for the half of the house.

5. Since the LLC was running Airbnb for half of the house, can we still get the $500,000 capital gain tax exemption when we sell the house?

Again, can't provide a definitve "yes/no" answer. On the personal use portion of the sale you will get an exclusion equal to the percentage of the entire property that is personal use only and was "never" business use of any type.

On the business use side, you have to have used that portion as your primary residence for at least 2 of the last 5 years you owned it. Depending on the status at the time of the sale, that will determine if that portion qualifies for a prorated exclusion, or no exclusion at all. It gets complicated, and is why you "need" to seek person-to-person fact-to-face contact with a tax professional in your local area so they can educate you on all of the "many" possibilities here.