Mixed Use Property - Capital Gains Exemption

[inquisitive]

Can anyone explain how the $250,000 rule works for a mixed use property? I am currently living in a single use property and renting out 2/3 rooms. Based on surface area I could actually say I am renting out 90% of it. If I use the latter, when I sell it can I take 10% of the profit and not pay taxes on this portion up to $250,000?

 

[jimnjana]

As long as you owned it and lived there, you get the full exclusion. What you have to pay taxes on is the depreciation recapture on the portion of the property that you used as rental.

 

[kaneohe]

I would doublecheck to verify (asked at fairmark.com forums w/o answer so far) but this sounds similar: How does IRS handle the sale of a home (Capital Gains Tax) when one of the rooms is rented to our business.? - Yahoo! Small Business

If this applies to your situation, it sounds like you treat as selling 2 separate properties....a residence and a rental property. You can apply the exemption to the residence portion but not to the rental property. The rental property would then pay capital gains on the recovered depreciation and any capital gains (2 different rates). The residence would get the exemption and you would pay capital gains on any gain above that. Since the residence is only 10% , you'd have to have a castle to really benefit from the 250K exemption.
Have you considered getting rid of the renters, then living there for 2 yrs to get the whole exemption? I guess whether that is worth considering depends on how large the gains are.

 

[jimnjana]

IRS pub 593 spells it out and provides an example. What you took for depreciation is reported as a section 1250 gain on schedule D. You are otherwise entitled to full amount of exclusion.

 

[kaneohe]

J.......could you pls let me know what pg that is on. Also the Pub. # you cited seems not quite right....perhaps a typo? http://www.irs.gov/pub/irs-pdf/p593.pdf thanks.

 

[jimnjana]

Kaneohe, oops sorry fat fingered pub 523.

page 17 starts the section

http://www.irs.gov/pub/irs-pdf/p523.pdf

 

[Martha]

The publication is 523. Publication 523 (2009), Selling Your Home

When the rental rooms are part of your living space/home you don't have to divvy up the gain. In contrast, I lived in a fourplex and when it sold I had to separate the gain between the rental portion and the home portion. I ended up paying recapture and capital gains on the rental portion. No tax on the home portion.

 

[Martha]

Oops, cross posted with Jim.

 

[kaneohe]

Thanks, Martha and jimnjana, for clarifying. Apologies for being too lazy to look it up............so can 250K exclusion be used against the 1250 gain also?

 

[jimnjana]

Thanks, Martha and jimnjana, for clarifying. Apologies for being too lazy to look it up............so can 250K exclusion be used against the 1250 gain also?

No. You are stuck with paying taxes on any depreciation you took on the portion of your home that you used for business purposes/rental.

 

[inquisitive]

Wow, thanks for the very useful info, I didn't realize that it worked this way. So if I plan on selling it within the next few years I should really make sure that I've lived in it for 2/5 years and should also plan to be married by then...