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Sale Rental Property that was converted FROM Residence

RP
Level 1

TP Purchase Real Estate, Lived in it for three years and then converted it to Rental, after two years, He sold the property (last use was Rental) a a gain of $150000 .... I recaptured the Depreciation taken during the Rental Period and excluded all the gains (Irc121) >.. He never excluded gains on a property before ... 

Any thoughts on whether this is correct will be appreciated .

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3 Replies 3
TaxGuyBill
Level 15

With the limited information you provided, it sounds like you did it correctly.

There will be tax based on the gain based on the depreciation.  If the taxpayer's qualify for the 2-out-of-5 year rule, the rest of the gain can be excluded (assuming it was there was not other periods of time it was not their Principal Residence while they owned it).

RP
Level 1

Thanks for the Reply .... They lived in the property for three years, then rented it out for two years and took depreciation , so I think this is a change of use and I have to prorate the IRC121 Exclusion .. . (I know that that I have to recapture the depreciation)

It seems like most of my Peers think that I should exclude all the gain (excluding the depreciation of course) that they have under IRC 121 (60k GAIN)... I am not sure I agree . Your thoughts ? 

 

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rbynaker
Level 11

When in doubt, I go straight to the source.  Start with IRC 121:

https://www.law.cornell.edu/uscode/text/26/121

Pay close attention to (b)(5)(C)(ii)(I).