Business use of home - Sale of house

Posted by gindie on September 1, 2009, 12:19 am

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At the closing of the sale of their house today, each of my parents
was given a form to fill out to determine whether the sale needed to
be reported to the IRS. They were the normal questions (lived there 2
out of 5 years?, etc.), but they came to one that asked about business
use of the home since 1997. My father used part of the basement in
his freelance art business starting several years prior to 1997 until
1999, so we had to mark that box Yes. That led the closing agent to
retrieve those forms and fill in another one to report the sale.

My father said he did take deductions for the basement office for the
years he freelanced. I skimmed Publication 523 to determine what he
needs to do, but I have questions:

1) I unserstand that he has to report the previous years' deduction
amounts on Schedule D and pay Capital Gains tax on them, correct?

2) Does he have to go back to the first year he claimed the deduction,
or only to 1997, which was the focus year of the form they started to
fill out?

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Posted by Arthur Kamlet on September 1, 2009, 12:25 am

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>At the closing of the sale of their house today, each of my parents

>was given a form to fill out to determine whether the sale needed to

>be reported to the IRS. They were the normal questions (lived there 2

>out of 5 years?, etc.), but they came to one that asked about business

>use of the home since 1997. My father used part of the basement in

>his freelance art business starting several years prior to 1997 until

>1999, so we had to mark that box Yes. That led the closing agent to

>retrieve those forms and fill in another one to report the sale.

>My father said he did take deductions for the basement office for the

>years he freelanced. I skimmed Publication 523 to determine what he

>needs to do, but I have questions:

>1) I unserstand that he has to report the previous years' deduction

>amounts on Schedule D and pay Capital Gains tax on them, correct?

>2) Does he have to go back to the first year he claimed the deduction,

>or only to 1997, which was the focus year of the form they started to

>fill out?

They should recapture Section 1250 (the building) depreciation
for the home office allowed or allowable, after May 6, 1997.
Use Form 4797 and since that is a deceptively easy form to get wrong,
perhaps seek professional tax help.

Another reference:

http://www.smsmallbiz.com/taxes/Taxes_On_the_Sale_of_A_Home_Office.html
--

ArtKamlet at a o l dot c o m Columbus OH K2PZH

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Posted by Mark Bole on September 2, 2009, 8:22 am

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Arthur Kamlet wrote:

> They should recapture Section 1250 (the building) depreciation

> for the home office allowed or allowable, after May 6, 1997.

Terminology details, minor correction to above:

They would only have ordinary income due to *recapture* if they had Sec.
1250 depreciation in *excess* of straight line (SL), in other words
accelerated depreciation. Since SL depreciation would have been the
case here, there is NO recapture of anything.

Since there is no recapture, we now have *unrecaptured* Sec. 1250 gain.
This would be the lesser of the total gain or the total depreciation.
Such gain will be taxed at a maximum rate of 25% instead of the lower LT
capital gains rates.

-Mark Bole

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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Posted by Arthur Kamlet on September 2, 2009, 1:28 pm

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>Arthur Kamlet wrote:

>> They should recapture Section 1250 (the building) depreciation

>> for the home office allowed or allowable, after May 6, 1997.

>Terminology details, minor correction to above:

>They would only have ordinary income due to *recapture* if they had Sec.

>1250 depreciation in *excess* of straight line (SL), in other words

>accelerated depreciation. Since SL depreciation would have been the

>case here, there is NO recapture of anything.

>Since there is no recapture, we now have *unrecaptured* Sec. 1250 gain.

>This would be the lesser of the total gain or the total depreciation.

>Such gain will be taxed at a maximum rate of 25% instead of the lower LT

>capital gains rates.

Yup. Thanks.
--

ArtKamlet at a o l dot c o m Columbus OH K2PZH

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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Posted by D. Stussy on September 1, 2009, 8:48 pm

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> At the closing of the sale of their house today, each of my parents

> was given a form to fill out to determine whether the sale needed to

> be reported to the IRS. They were the normal questions (lived there 2

> out of 5 years?, etc.), but they came to one that asked about business

> use of the home since 1997. My father used part of the basement in

> his freelance art business starting several years prior to 1997 until

> 1999, so we had to mark that box Yes. That led the closing agent to

> retrieve those forms and fill in another one to report the sale.

> My father said he did take deductions for the basement office for the

> years he freelanced. I skimmed Publication 523 to determine what he

> needs to do, but I have questions:

> 1) I unserstand that he has to report the previous years' deduction

> amounts on Schedule D and pay Capital Gains tax on them, correct?

Actually, Form 4797, which flows to Schedule D. This may be taxable at
ordinary income rates.

> 2) Does he have to go back to the first year he claimed the deduction,

> or only to 1997, which was the focus year of the form they started to

> fill out?

Only to 1997. Depreciation taken prior to and including May 5, 1997 was
exempted from recapture by Congress.

Note: If he had a profit for all years, and thus no Section 280A
carryforward (tracked on Form 8829), then this is easy. However, if he has
an unused carryforward, then technically, he has not been allowed the
depreciation in prior years. If the recognized sale exceeds this
accumulation, then it is allowed all in 2009. If the sale is less than the
accumulation, then it continues, and Form 8829 wil be filed for all future
years until it is used up, even if he's no longer in the business. Note
that the net income from the sale of the home AFTER the exclusion is
applied is what carries onto Form 8829, line 8. What Form 8829 then tells
you is how much of the gain gets moved from Schedule D to Form 4797 (i.e.
the depreciation deduction allowed); the gain on the sale itself doesn't
change - but its allocation between ordinary tax rates and capital gains
rates does.

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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