Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, April 26, 1993 TAG: 9304250030
SECTION: BUSINESS PAGE: 6 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
His maturing family causes the need for more space, so we will convert both apartments to his use and eliminate any rental property. If this arrangement proves unsatisfactory, I will sell the property and buy something more suitable to our needs without rental property.
An article in your column implied that no specific length of time is required from establishment of personal residence until the sale with regard to capital gains tax. However, I have read in several IRS publications that "three of the last five years" is required as a personal residence to avoid that tax.
My basis in the property I now own is somewhat difficult to establish because I inherited one third, purchased a second third a year later and purchased the final third two years after that. The percentage of rental to personal use has changed often during these 15 years. I have claimed expenses for repairs, interest, taxes and other costs for the portion being rented and 20-year straight-line depreciation for what I believe to be half the base.
A: You state that you have depreciated half of your basis in the house, which would probably cover both apartments, yet you suggest that your son paid no rent. You should not have depreciated his living space unless he has paid you a fair-market rental.
Also, depreciation is based on the square footage allocated to property for which you receive fair-market rent. You cannot simply use an arbitrary figure like one-half unless that is a true allocation of the space.
Harry Schwarz, a certified public accountant with the Roanoke firm of Schwarz & Co., said you must convert the garage to a residence for a reasonable period of time and demonstrate your intention of making the total property your home. The burden is on you to prove this intention to the Internal Revenue Service.
If you are 55 or older, you must have lived in your home for three out of the prior five years in order to claim an exclusion of up to $125,000 of a capital gain if you sell your home. This is a once-in-a-lifetime opportunity. You would not want to claim this exclusion if you intend to buy another home of equal or greater value.
Schwarz said no such occupancy rule applies to conversion of rental property to a principal residence. The rules say only that you must live in the entire property for a reasonable period of time. He said a year is probably long enough if you occupy the whole property.
If you sell then, he said, you can defer taxes on any gain provided that you roll over the money into a home of equal or greater value.
Your tax basis in that situation, he said, would be the net depreciated value of the portion you depreciated on the rental unit and all of the value of your own residence.
If you continue to rent out the apartments, you would have to recognize a gain on the rental portion. The rental portion should be based on actual square footage allocation between your own living quarters and the rented apartments.
One-time tax exclusion of capital gains on home
Q: I'll be 55 in December; my wife is six years younger. The deed to our home is in both names. Can we sell our home without paying capital gains tax, or do we have to wait until we're both 55?
A: Couples may claim a one-time exclusion of up to $125,000 in capital gains on their home when one of them reaches the age of 55. You can, therefore, sell your home in December and take the deduction on your taxes.
Wendy Funderburk, a certified public accountant with the firm of Spencer and Associates in Roanoke, said you may claim the exclusion if you meet other requirements.
Among other requirements - such as having lived in the house for at least three of the past five years - you must own the home as joint tenants, which most couples do, Funderburk said. In addition, you must file a joint return for the year of the sale, and both you and your wife must join in signing the election.
Funderburk said a couple will get only one exclusion. Your wife will be barred from making a later claim after she turns 55, even if you are no longer married then.
Mag Poff will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke, Va. 24010.
by CNB