Selling 2 owner occupied homes in 1 year?

Question

Good Morning all,

I have a question about selling my home.  Here's the situation:  My husband and I lived in our home for 2 years.  We had to move to another city.  Instead of selling that home, we're renting it out.  I know the tax law says that you must live in your home for 2 of 5 years in order to qualify for the tax free profit (up to $500K for married couples).  We are now living in another home - and plan to sell when we move again (we're military - we move a lot).  My question is --- can I sell both homes under the free profit rule?  Most likely - they'll sell the same year (2010).

thank you

Joe Wilson · Answer

Jon (Wheatie),

§1250 recapture deals with depreciation taken over straight line depreciation and that is no longer allowed.  It is 27.5 SL depreciation that is allowed and therefore there will not be any depreciation recapture taxed at ordinary rates.  If your accountant wants to convert capital gain to ordinary gain when it clearly shouldn't be, then you should seek further advice.

If you took depreciation expense on your returns other than what was allowed, you should amend your return or simply file a 3115, change in accounting method, to establish your depreciation method as your own and adjust your basis by the amount of depreciation that which you actually took.  So you won't lose your basis because you did not take your depreciation.

As a matter of fact, it doesn't even come up.  I have never seen an IRS audit because the IRS refigured your accumulated depreciation based on your original purchase.  You put down your original purchase, increase it by additions and reduce it by the depreciation that you actually took and be done with it.  Most accounting methods are automatic and if you have established 3 years of consistent reporting on your depreciation, then it is an automatic method and you will be required to use that figure to determine your adjusted basis and not what the IRS has listed in their publication.

John (REI),
You are right.  Real property is straight line and therefore depreciation recapture will not be a factor.  Personal property recapture is all depreciation expense, but as a general rule with real estate transactions we take the position that personal property is sold at adjusted basis and real property is sold at the remainder selling price and there will be no recapture on the transaction.

Jennifer99,

You will not be able to take two gain exclusions in a two year period from the date of sale of the first home sold and the gain was excluded.  There exists an exception for unforeseen circumstances and you should look here for your answer.

http://www.irs.gov/publications/p523/ar02.html#d0e3569

I would depreciate the property as that will generate a tax loss for your income tax return and you will save money on your tax liability.

Joe

Frank Adams · Answer

After I signed off earlier I realized that I hadn't answered your original question. The answer is NO, you can't do 2 in one year.

Depreciation is NOT a choice, if you do not take it as you go the IRS will do it at the sale.

all cash

Jon Holdman · Answer

Joe,
After another round of e-mails with my accountant, she says you are correct about the depreciation recapture tax.  No recaputure tax as long as the property's been on straight line depreciation.  That's a good piece of information.  Thanks for your input
Jon

Jennifer Hillberg · Answer

So, with my house that was lived in for 2 years by me (and my family) -- and is now a rental (as of March this year) -- should I depreciate it on my 2007 tax return?

Frank Adams · Answer

Yes, depreciate it.

Also, keep very detailed records of all expenses, phone calls, travel everything. In fact I would go to irs dot gov and order the workbook and tax forms to begin getting familiar with what is allowed.

Oh, yeah, definitely plan on using a CPA to do your taxes from now on. Setting up the depreciation is one thing that tends to trip up us amateurs.

all cash

Jennifer Hillberg · Answer

Thank you -- so helpful!!!!

Jon Holdman · Answer

Here's the other thread where this was discussed, and I asked some related questions:
http://forums.biggerpockets.com/viewtopic.php?t=12768

My reading of the IRS docs makes me think your basis is reduced by the actual or allowed depreciation.  I read that to mean that even if you didn't take depreciation in some years, it still gets taken off your basis when you sell.  This is the "adjusted basis".  Then, you pay recapture tax on the amount of gain (adjusted sales price less adjusted basis) up to the amount of depreciation taken or allowed.  Any remaining gain is taxed as a capital gain.

I looked back on an old e-mail discussion with my accountant, and she agrees with this understanding.  No mention of accelerated depreciation.  If this is not correct, I'd sure like to see a reference to an IRS doc that clarifies the situation.  I'm not too concerned with the taken vs. allowed depreciation, but depreciation recapture vs. long term capital gains is very significant.   For that matter, I'd like to find a pointer to an IRS doc that actually explains depreciation recapture tax at all.

Jon

Jennifer Hillberg · Answer

Oh shoot - now you've lost me -- I'm showing my "noviceness" -- what is accelerated depreciation?

Account Closed · Answer

The IRS will do what at the sale?

Someone else said that recapture only applies to accelerated depreciation. Acceleration is no longer an option so there will be no recapture in this transaction.  Do I have it correct?

John Corey

Jennifer Hillberg · Answer

okay - thank you very much for your info!