Case Study - Partially Residential
Property
Tom Stonehouse, a 72-year-old
taxpayer, owns a four-unit apartment building that he had purchased
five years ago. He occupies one unit as his personal residence and
rents out three units. Desiring to move to a warmer climate, Tom
decides to sell the building and move in with his nephew. Tom's records
show the following:
| Cost of building |
$80,000 |
| Capital improvements |
+ 8,000 |
| |
$88,000 |
| Less: Depreciation on rental units |
-10,100 |
| Adjusted basis |
$77,900 |
Tom sells the building on May 1, 2014, for $220,000 and
incurs selling expenses of $10,000. Since only one-fourth of the building
was used as his personal residence, Tom would compute his gain as
follows:
| |
Apartment Residence |
Rental Building |
| Usage allocation |
(1/4) |
(3/4) |
| (1) Selling price |
$ 55,000 |
$165,000 |
| (2) Selling expenses |
- 2,500 |
- 7,500 |
| (3) Amount realized (adjusted sales price) |
$ 52,500 |
$157,500 |
| (4) Basis (including improvements) |
$ 22,000 |
$ 66,000 |
| (5) Depreciation |
|
- 10,100 |
| (6) Adjusted basis |
$ 22,000 |
$ 55,900 |
| (7) Realized gain ((3) minus (6)) |
$ 30,500 |
$101,600 |
| (8) Gain subject to exclusion |
$30,500 |
|
| (9) Gain subject to tax |
|
$101,600 |
Of the gains subject to tax on line (9), $10,100 is
taxed at a 25 percent rate because it represents depreciation that
must be recaptured. The remainder would be taxed using the capital gains tax rates.since he held the
property for more than one year.
Also, the gain on the sale
may be included in net investment income for purposes of computing
the net investment income tax. A 3.8
percent net investment income tax applies to individuals whose modified
adjusted gross income exceeds $250,000 for joint filers, $125,000
for married taxpayers filing separately, and $200,000 for others.
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