[chaley10]

Information
Manhattan Boston
2008 Primary N/A
2009 Primary N/A
2010 Rented Primary
2011 Rented Primary
2012 Rented Primary

I was living in Manhattan till 2010 when I started at a new job in Boston, at which time I rented my Manhattan apartment and bought a residence in Boston.

I lost my job December of 2011, qualified for unemployment, and decided to sell both my properties and downsize. (Manhattan was primary residence 2 of last 5 years, Boston primary residence the last 3 years)

The apartment in Manhattan sold in September of this year, and the apartment in Boston I will close on in January of next year.

Since I was laid off and qualified for unemployment, can I declare the 250k capital gains deferral on both residences?

[AtlantaTaxExpert]

No, just ONE residence qualifies for the deferral.

Claim the one which generated the largest capial gain UNLESS you depreciated the NY apartment, in which case the NY apartment is considered to be a business

[AtlantaTaxExpert]

Property and is NOT eligible for the 250k exemption.

[chaley10]

Thank you for your reply AtlantaTaxExpert.

I thought that according to the Taxpayer Relief Act of 1997, SEC. 312 - Exemption From Tax For Gain on sale of principal residence - that as long as my property in NY was my primary residence for 2 of the past 5 years, that it would qualify for the 250k exemption, even if I rented it for 3 of the 5 years. My gain is larger on the property in NY, so I would like to use the exemption for that property.

[AtlantaTaxExpert]

That is true, IF you did not depreciate the property on the Schedule E. Claiming the depreciation is an indicator to the IRS that your intent was to convert the property to a business status, thus making it ineligible for the exemption.

[chaley10]

AtlantaTaxExpert - I appreciate your time, and will not take up any more of it after this last question. I have over 250k in gain on the NY apartment, so I apologize for harping on this, but the tax consequences are considerable to me. Can you show me where in the tax code it states that if you depreciate the property you loose the 250k exemption? I can't find reference to that anywhere. Everywhere I look it states "Provided the ownership and use tests are met, renting the property does not jeopardize the gain exclusion. A taxpayer will qualify for the exclusion if he or she owned and used a home for two years and converted the residence to rental property for up to three years." I can't find any reference that says if you depreciate the property you loose the 250k exemption?

Thank you again.

[chaley10]

Depreciation for business use after May 6, 1997. If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. If you can show by adequate records or other evidence that the depreciation deduction allowed was less than the amount allowable, the amount you cannot exclude is the smaller figure.

Example. Ray sold his main home in 2001 at a $30,000 gain. He meets the ownership and use tests to exclude the gain from his income. However, he used part of the home for business in 2000 and claimed $500 depreciation. He can exclude $29,500 ($30,000 - $500) of his gain. He has a taxable gain of $500.

[chaley10]

It looks to me like the 250k deduction is reduced by the amount of depreciation you have taken, not excluded entirely.

[MLSNC]

The code states "Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more."

Therefore, there is no reason you can not exclude the gain on the NY property, subject to the depreciation recapture.

I do not know of any reg that supersedes that just because the property was rented during the 5-year period. In addition someone in your situation can do a tax free exchange and use the $250,000 to increase the basis in the acquired property.

The only issue I see is when taxpayers try to convert a loss which is not deductible to a loss which would be deductible if it is rental property, but that is not a problem here.

Please note: I am not familiar with the state of NY so for state purposes it may be different.

[AtlantaTaxExpert]

I have not had any client in your situation, so I cannot soeak from first-hand experience.

It was my understanding of the IRS interpretation that depreciation denotes business use, per conversation with the IRS on the phone, but their guidance may be faulty, so use MLSNC's guidance.