One Time Exemption
I have a client who lives in a three-unit building in Chicago. His son occupies a second unit. the third unit has been vacant for more than 3 years.
However, when he bought the building 30 years ago two of the three units were rented. So he depreciated to thirds of his basis as income property.
Now he'd like to sell and, of course pay as little tax as possible. Can he take the one-time exemption on this property since it has been solely his primary residence for the last 3 years?
Yes, he can.
First, the one time exclusion no longer effectively exists, because a taxpayer can elect the 121 exclusion once every two years. The 121 exclusion allows the property own to sell his or her primary residence and exclude up to $250K in capital gain taxes if they are single and up to $500K in capital gain taxes if they are married provided they have lived in the property for 24 months out of the last 60 months.
In this case, he has lived there for 3 years so he would qualify. The 121 exclusion would apply only to the portion that was treated as his primary residence. It is not necessarily 1/3. It could be allocated differently based on square footage or other means if it was legitimate and defendable. The other portion would be allocated as investmetn property and could be exchanged with like kind replacement property.
[addsig]
Thanks so much, Bill, for your response. Let me see if I get this sraight. Assuming a sale at $600,000 and a zero basis (not the case, just easy to figure)
He could argue that he has occupied the entire building since he had no tenants and had some of his stuff in each room and exempt $500,00 (he is married) of the sale price and take the other $100,000 as long term capital gains?
He could argue that he occupied the top floor apartment (the part he actually lives in), take $200,000 as the exemption and the balance as a capital gain or 1031 exchange into another property for this portion?
He could argue he occupies two floors because his son occupies the second apartment and the son is a member of his household. Take $400,000 in exemption and $200,000 to a 1031?
Now I know why I am a simple real estae developer. The tax code is too complicated for me.. Thanks again for your help.
BTW, this change from a one-time exemption to an every two years exemption is news to me. Does this mean I could move every 30 months into a new house and (assuming I were married) make up to $500,000 on each transaction tax free? What a great deal! I might have to think about moving into a real house.
commercialking,
I would go one step further. Under the assumption that the second unit is reserved for the son' s use and not rented to the son, and that the third unit is NOT in service as an unoccupied rental unit, I would claim the entire building as my primary residence since the entire building has been devoted to personal use for the past three years.
Of course, depreciation recapture of any depreciation taken since 1997 would still come into play.