Will I owe capital gains tax on this sale?

13 Replies

I have lived in my single family house for a little over 2 years. I rented the apartment above the garage out for 1 year. I was thinking of 1031 exchanging 20% of the proceeds from the sale (20% because that is how much of the house was rented) but am curious to know if I will owe capital gains tax on a portion of the remaining proceeds since I didn't occupy the whole house for 2 years. If so, what percentage of the proceeds for the primary residence portion would be taxed?

Also, what can I do if there is a huge tax penalty to offset this?

Do you mean you rented one of the room within the single-family house?  If yes, 

1) You do not have to exclude the portion of the house for the capital gain. Entire gain is qualified for the capital gain exclusion. You have to exclude the gain only if the rented space was separate dwelling unit ( duplex). If you rented a bedroom out of the house, you qualify for entire sale exclusion.

2) You will qualify for 250k exclusion if you are single. 

3) However, you have to recapture the depreciation you took on the rental portion of the house. This is the depreciation you have taken so far time 25%.

So, the only tax you will pay is Deprecation * 25%.

good luck. 

Originally posted by @Ashish Acharya :

Do you mean you rented one of the room within the single-family house?  If yes, 

1) You do not have to exclude the portion of the house for the capital gain. Entire gain is qualified for the capital gain exclusion. You have to exclude the gain only if the rented space was separate dwelling unit ( duplex). If you rented a bedroom out of the house, you qualify for entire sale exclusion.

2) You will qualify for 250k exclusion if you are single. 

3) However, you have to recapture the depreciation you took on the rental portion of the house. This is the depreciation you have taken so far time 25%.

So, the only tax you will pay is Deprecation * 25%.

good luck. 

 Ashish, yes, that's correct, room in house. It's rare posts like yours that keep me coming here, thank you, you've made a HUGE difference in my day/month/year. I wish you were a CPA in WA so I could hire you for tax prep this year (did a 1031 exchange last year and was advised to outsource it rather than doing it myself this year).

@Jack B. , He can't tell you this but you should still hire @Ashish Acharya ,  Distance really doesn't matter anymore.  He can do state by state and is as awesome as his posts!  And no he's not my shirt tale relative (I just wish).

Originally posted by @Dave Foster :

@Jack B., He can't tell you this but you should still hire @Ashish Acharya ,  Distance really doesn't matter anymore.  He can do state by state and is as awesome as his posts!  And no he's not my shirt tale relative (I just wish).

Really? I may have just found a new CPA.

@Ashish Acharya

If you want to give me a quote for my tax situation; full time IT professional, 4 rental properties, one primary residence. I already  have all of my income and expense information for the rentals in Excel laid out to match Schedule E. I sold a rental last year and did a 1031 exchange with the proceeds (added a little to it in the end to buy two new rentals).

@Dave Foster and @Jack B. ,  thanks for good words. 

I would love to but we focus more on business returns.  There are much more qualified and experienced accountant here. Reach out to 

@Michael Plaks ,

@basit Siddiqi 

@branden hall 

and many more here.

Wow @Jack B. , Fired before you could even hire him!  A Good list  by Ashishand a fun forum post for today!

@Jack B. , @Ashish Acharya

The original post said Jack rented an apartment above the garage.  This sounds like a separate dwelling structure that is not within primary residential dwelling space.  If the rental is treated as a separate property from the primary residence, would the tax treatment be different than previously described?

@Dave Toelkes

I asked him if it the room is within the house. He said yes, It is in one the replies. 

If the unit is separate and considered separate dwelling unit such as duplex,  you dont qualify for the 121 exclusion on the rented unit. 

Originally posted by @Dave Toelkes :

@Jack B., @Ashish Acharya

The original post said Jack rented an apartment above the garage.  This sounds like a separate dwelling structure that is not within primary residential dwelling space.  If the rental is treated as a separate property from the primary residence, would the tax treatment be different than previously described?

 It's all in the same house, it isn't a separate building or unit, as it's in the same house and the apartment has access to the rest of the house despite being above the garage, just like renting out a room.

Originally posted by @Ashish Acharya :

Do you mean you rented one of the room within the single-family house?  If yes, 

1) You do not have to exclude the portion of the house for the capital gain. Entire gain is qualified for the capital gain exclusion. You have to exclude the gain only if the rented space was separate dwelling unit ( duplex). If you rented a bedroom out of the house, you qualify for entire sale exclusion.

2) You will qualify for 250k exclusion if you are single. 

3) However, you have to recapture the depreciation you took on the rental portion of the house. This is the depreciation you have taken so far time 25%.

So, the only tax you will pay is Deprecation * 25%.

good luck. 

Hi @Ashish Acharya

Can you point me to an article or link for this? I haven't been able to find one in searching on google.

@Jack B.

CPAs buy access to Tax Research services, and we find our research and answeres there.  I have not see any articles on this. 

Honestly, if you have a CPA who is not giving you answers, you need to change. It's not your job you do research, it is you CPA's job. You paid him for that. 

There is a brief mention of this on Pub 523 page 10. 

"Business or Rental Use of Home: Determine whether the space used for business during the 5 years before the sale is considered to be within your home or not. If the business or rental space was physically part of the living area of your home, such as a spare room used as a bed-and-breakfast bedroom or attic space used as a home office, your business usage doesn’t affect your gain/loss calculations. Complete How To Figure Your Gain or Loss Worksheet.

If the business or rental space wasn’t within your living space, such as a first-floor store with residence, an apartment with its own entrance (and kitchen and bath), or a working farm with a farmhouse on the property, continue to Determine whether the business"

hope that helps. 

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here