Inventory of Household Possessions

Inventory of Household Possessions

Inventory of Household Possessions.  Do you have a list of all your personal belongings in case of an emergency?  Natural and man made disasters happen – are your ready to provide proof for any claims you may have to file? Get this free and easy-to-use app that creates a quick inventory of your household possessions,…

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Tax Deduction

Capital Gains Exclusion – Do You Qualify Even If Home Is Rented Out?

Deborah Laemmerhirt  Call Direct:  203-994-4297  www.HomesInConnecticutForSale.com

If you rent out part of your home for extra income, does that mean you can’t claim the valuable federal home sale gain exclusion privilege when you sell? Not necessarily. In many cases, you can still take advantage of the gain exclusion break.

As long as the rental portion of your home was in the same dwelling unit as your residence, you can use your gain exclusion to shelter profit from the entire property. In other words, you don’t have to split your sale into two separate transactions for tax purposes (one for the sale of the residential part of your property and another for the sale of the rental portion).

You will be taxed on gain up to the amount of depreciation deductions claimed for the rented portion of the property. (This applies to rental usage after May 6 1997.) You’ll owe a maximum federal rate of 25 percent on this unrecaptured Section 1250 gain.

Although you have to pay some tax, keep in mind that you collected earlier tax savings from depreciation deductions on the rental part of property.

What About a Separate Unit?

The tax outcome is less favorable when the rental portion of your property is not in the same dwelling unit as the residential part. For example, let’s say you claimed rental deductions for a former carriage house, garage apartment, or finished basement with cooking facilities, a bathroom, and a separate entrance. These are considered separate dwelling units that are not part of the residential portion of your property.

If this is your situation, you must pass the tax law ownership and use qualification tests (see right-hand box) for both the rental and the residential parts of your property in order to treat the sale as a single transaction eligible for the gain exclusion.

If you fail the tests for the rental portion, you must calculate separate gains for the rental and residential portions of your property. You can then use the gain exclusion only to shelter profit from the residential part. In general, any gain on the rental part will be fully taxable. You’ll generally owe a federal income tax rate of no more than 25 percent on gain up to the amount of depreciation (claimed for rental use after May 6 1997) and no more than 15 percent on any remaining profit from selling the rental portion.

If you’re contemplating selling your home when part was used as a rental, here are a couple of possibilities to consider:

Strategy #1: When the rental part of your property is in a separate dwelling unit, and you think you may sell the whole property before too long, you may want to stop renting that portion for at least two years prior to the anticipated sale date. That way, you can use the gain exclusion to shelter profit from the entire property. However, ignore this advice if your entire exclusion amount would be absorbed by the gain on the residential part of the property (in this case, continuing to rent out the rental portion of your property won’t cause any tax harm).

Strategy #2: Continue renting if the rental portion of your property is within the same dwelling unit as the residential part. There’s no tax downside.

Consult with your tax adviser if you have questions about taking advantage of the home sale gain exclusion in conjunction with renting out part of your property. Advance planning may be necessary to maximize the tax savings.

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