Rental Real Estate Property Sale - Non Main Home

[smiddaugh]

Greetings. Preparing for 2023 individual tax filing and any prepayments needed. 

Query: Can I partially exclude sale gains? Also, how to file depreciation recapture? 

Scenario: Bought single-family dwelling in GA in 1996. Lived in dwelling until 2000. Moved from home due to active duty military change-of-station. Made home a rental property after moving. Retired from active duty in 2012. Continuous rental property until home sold in April 2023. Cost basis and adjusted basis are less than sale proceeds. Therefore, the sale realized a gain. 

IRS Publication 523, page 6, states partial exclusion possibility due to work-related move greater than 50 miles. The change of station, active duty, was greater than 50 miles. Publication 523, page 11, Business or Rental Use of Home, states a five and ten-year period exemption exclusion after last day of home use and serving on qualified extended duty as a member of the uniformed services. 

Is any of the capital gain excludable? Do I use worksheet 2 and 3 of Pub. 523? Do I use IRS Form 8949 only? Or must I also use 4797 and, if so, what section of the 4797? 

Thank you sincerely for your assistance in the query!  

[Carl]

Retired from active duty in 2012. Continuous rental property until home sold in April 2023

Unfortunately, you do not qualify for even a partial exclusion. Your maximum allowed 10-year suspension of the "2 of last 5" rules ended before you retired over 10 years ago prior to the sale.

The suspension started in 2000 on the day you moved out, and ended in 2010. In order to have qualified for the full exclusion the property needed to be sold by/in 2013. For a partial exclusion, by/in 2015.

[smiddaugh]

Good morning, Carl, and thank you for this reply. I understand the 2 and 5 along with the total 15 aspects. However, publication 523 states the potential to partially exclude if the property was a rental property except for time after 2008. Might you have insight on this potential exclusion? 

Thank you!

Steve

[Mike9241]

that exclusion doesn't apply either. it requires converting the rental back to your primary residence for any 2 of the 5 years before the sale. 

[Carl]

However, publication 523 states the potential to partially exclude if the property was a rental property except for time after 2008.

Can you point out on what page and column of the publication that is? I can't find it. I think you read it wrong. The period of time it was a rental "AFTER" 2008 and/or not your primary residence (not including the period of suspension) is unqualified use.

Bottom line is, you do not qualify for any exclusion what-so-ever. The rule does not extend anything. The rule allows you to "suspend" the day count for a maximum of 10 years.

The property was your primary residence from  1996 until 2000. So there's no doubt it was your primary residence for at least 730 days.  Since you don't provide more details on the exact date you moved out of the property, I'm going to assume a move out date of Dec 31, 2000. Counting back 730 days, your "lived in as primary residence" day count starts with day 1 on Jan 1, 1998 and ends on Dec 31, 2000. That's your 730 days. The day count is suspended, and therefore stops on Jan 1 2001.

The day count resumes on Jan 1, 2011 with that date of ownership being day 731. Day 1826 (which is 5 years) of ownership is on Jan 1, 2014. You would have been required to sell by that date to qualify for the full exclusion.

To qualify for a partial exclusion, of which the lowest partial exclusion would be 1/24 of the potential $500,000 gain, which is $20,833, you would have to of closed on the sale of the property before Jan 1, 2016. Bottom line is, you do not qualify for an exclusion, full or partial unfortunately, in any way, shape, form or fashion.

[smiddaugh]

Hello and good morning Carl! I wish to thank you for your time and effort. I understand that any potential for exclusion does not apply to my circumstance. In order and, yes, the publication 523 section I mentioned would only apply if the residence were considered my "home" and not a business (rental in this case). So the section where worksheet 2 and 3 are do not apply. 

Steve