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A client bought a townhome in 4/2013 and lived there until December 2016. In 2017 his brother lived in the house and paid the mortgage. Last year preparer reported it as a rental. The townhome sold in May of 2018. So the owner used it as his personal residence for two of the last 5 years but not for 17 months. How do I report an exclusion for the part of the time it was used as a personal residence in 2018?
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if the brother lived in the house for a year and just covered the mortgage (and maybe insurance and taxes) it doesn't sound like there's any kind of profit motivation. You should check on the points that Rick made.... I assume depreciation was established last year and the sch e resulted in a loss. Personally, I'd amend the 2017 and take the sale of primary exclusion in 2018. I don't think it looks suspicious. It does have to be realistic.
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https://www.law.cornell.edu/uscode/text/26/280A#d_3
"(3) Rental to family member, etc., for use as principal residence
(A) In general
A taxpayer shall not be treated as using a dwelling unit for personal purposes by reason of a rental arrangement for any period if for such period such dwelling unit is rented, at a fair rental, to any person for use as such person’s principal residence."
The hinge really is fair rental. Don't try to figure this out yourself, get a third party (realtor) to run some comps. This gives you the basis for a tax return position, one way or the other. I'm comfortable with a rental number that's 10% lower than the comp rate. It's easy to argue that rental to a relative comes with a lower risk and justifiably a lower rent. In the 10 - 20% discount range we have a conversation about why, and document things, but it's not out of the question. Beyond 20% discount IMO is a hard sell.
Rick
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Use the "Home Sale Worksheet".
If it was still a rental in 2018, you can 'link' the Asset Entry Worksheet to the Home Sale Worksheet (it is in the disposition section of the Asset Entry Worksheet).
However, you said it was a personal residence in 2018? Did the client move back into the home? Did he use it as his Principal Residence in 2018? Using it as his Principal Residence would trigger the Nonqualified Use rules.
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