Capital Gains on Multi Family used as Primary Residence

[jennannedean]

I have owned a two-family property for 3 years. We have used one unit as our primary residence but have always rented the second unit (50% of property.) If we were to sell the building in order to buy a single family home as our new primary residence, my understanding is that I would owe capital gains taxes on the proceeds of the sale as they are not "like properties" and the current property has not been used 100% as our primary residence for two years to qualify for a primary residence exception. Is that correct?

[Critter]

Ok ... to make it simple ... you technically are selling 2 properties ... the personal residence and the rental. 

The personal portion can be excluded ( this includes the sale of the land ) if you qualify but the rental portion cannot.   So you will prorate the selling price and the costs of sale to each part and remember the land belongs to only the personal residence ... none of it belongs to the rental. 

[12345letsgo]

Hello,

I think some of this situation may apply to me. I bought a 2-family home 9/26/2014, both units (A&B) were rented during 2014. Unit A rented until 10/5/2015 and Unit B I listed as rented for all of 2015 but vacant in 2016 (zero fair market value days, zero personal use days). 

I stopped designating Units A and B as rental units on 1/1/2017 in TurboTax, just had it as my residence - not any part as a rental.

I had moved into Unit A 10/15/2015, then I moved into Unit B in 2017 (after no longer designating the property as a multi-unit rental) and finally I moved out of Unit B 11/23/2020 after selling the 2-unit property.

For tax purposes to account for capital gain taxes should I break the property up as two rental units up to 2017 somehow to calculate depreciation and personal use days for the property and then somehow take into account I didn't list the property as a rental in TurboTax for the property from 2017 until the time I sold the property?

Please let me know if this isn't clear as I think it may be a little uncommon and complicated.  Thank you in advance for your help.

[DianeW777]

No, do not break the property up into two sales. You have used this property as your primary residence full time as of January 1, 2017, and there has been no rental activity since that date in either of the units.

When you enter the home sale in TurboTax it will ask for a couple of items that are needed to report the sale correctly.  

1. The total depreciation expense that was allowed during the period it was available for rent.  Check your prior tax returns for this figure.
2. The number of days the property was available for rent during the ownership period.

Results:

1. The amount of depreciation that was allowed will be completely taxable up to the amount of gain received on the sale.
2. The remaining gain if any, will be split between taxable and and amount eligible for exclusion by using the following formula.
   • The total days available for rent will be divided by the total days owned to determine the portion of the remaining amount of gain that is taxable for the rental period
   • The balance will be eligible for the home sale exclusion
3. TurboTax will do all the calculations based on your entry

Let's go step by step to enter your sale. 

1. Scroll to Less Common Income > Select Sale of Home (revisit or update) 
2. Continue to indicate you sold your home > Edit or add your home address and ownership > Continue
3. Enter the Sales date, Selling Price and Sales Expenses > Continue
4. Enter the Date Acquired and the Cost of the Home (includes any capital improvements for the period of ownership (do not reduce for depreciation expense) > Continue
5. Continue past the 'Less than two years' screen > Yes the home was not used for anything else > Enter number of days
6. Continue > Select No another home was sold after _____ date > Select ownership if married  > Continue
7. Select Yes for Depreciation After May 6, 1997 for both of you if married > Continue to answer the remaining questions

[12345letsgo]

Thank you very much for this help. I think I already did what you said and understand I can not break out the rentals into two properties to try and recoup more from living in the rental from 10/15/2015, but only since 1/1/2017 when I no longer designated the property a rental in TurboTax.

My remaining question is after I sold the property 11/23/2020 I moved to Texas. TurboTax is showing me a refund from MI, and taxes owed to Federal and MD at this point. I have a rental in MD under an LLC.  My question is do I need to complete a Texas income tax return also for the period 11/24/2020 to 12/31/2020?

Thank you again,

Tim

[12345letsgo]

Also, I did received my 1099-R from DFAS at my new address in Texas.

On the TurboTax "Select your State" screen I checked the block for Michigan (Texas was not available to check) . So, I guess my 1099-R still applies for the time I lived in MI and not for TX?

[MarilynG1]

@12345letsgo If you lived in both Michigan and Texas in 2020, you could 'allocate' part of your 1099-R income to each state, based on time lived there.

For instance if you lived in Michigan for six months, you could allocate 50% of the 1099-R amount on your Part-Year Resident return there. 

Since Texas has no income tax, you don't have to report the other 50% on a state return.

Click this link for more info on How to Allocate Income for a Part Year Resident . 

[12345letsgo]

Thank you! I just e-filed them before I saw this. Oh well, thanks again for your help.

God bless you all,

Tim