Discussion:Home office and Sec. 121 exclusion

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Discussion Forum Index --> Advanced Tax Questions --> Home office and Sec. 121 exclusion


Discussion Forum Index --> Tax Questions --> Home office and Sec. 121 exclusion

Jbcpa (talk|edits) said:

2 December 2009
At a seminar I recently attended, the presenter mentioned something I found hard to believe. She said that under the new rules of Section 121 dealing with exclusion of gain on principal residence, the use of part of the home as a home office will be treated as a nonqualified use, i.e. home office will taint the house as not used "exclusively" as principal residence, resulting in taxable gain. If she is right (which I hope she is not), home office deduction doesn't make sense (unless large portion of the home is used for business). Did anybody hear anything on this?

Bertkdo (talk|edits) said:

2 December 2009
JB,

I believe the rule is that you only have to recapture and recognize a gain for the depreciation taken on the residence. See Reg. 1.121-1(e)(1)

Belle (talk|edits) said:

December 2, 2009
Discussion:Sale of Rental / Residence - New 2009 Tax Law

This might help - and there are a lot more if you 'search'

DaveFogel (talk|edits) said:

2 December 2009
The residence doesn't have to be used "exclusively" as a principal residence. In my opinion, the presenter is wrong.

IRC §121(b)(4)(C)(i), which was added by the Housing and Economic Recovery Act of 2008 (P.L. 110-289), defines a “period of nonqualified use” as “any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.”

So, as long as the residence remains the principal residence, using a portion of the residence as a home office does not constitute “nonqualified use.”

Jbcpa (talk|edits) said:

3 December 2009
Thank you, Dave, for your analysis. I came to the same conclusion but couldn't find anything specific. I don't think the presenter has anything to support this either. The question arises whether any gain allocable to the home office in excess of the unrecaptured 1250 gain is a taxable 1231 gain or will be excluded under Sec. 121 if it is an otherwise qualified principal residence. Under the old rules, if the business use is related to same dwelling unit as the principal residence, no Sec. 1231 gain applied. I think I will contact the instructor because there were quite a few people who might have been misled by her conclusion.

Belle, I tried the search but was less successful than you in finding anything applicable (even though the discussion you found is a little different situation). Thanks.

Belle (talk|edits) said:

December 3, 2009
Jb - I remembered the discussion and it still took a bit to find it. Not exactly on point, but I thought it might help you clarify. Welcome.

DaveFogel (talk|edits) said:

3 December 2009
Jbcpa, regarding your other question as to whether any gain allocable to the home office in excess of the unrecaptured section 1250 gain is taxable, the answer is NO. In most cases, only the portion of the gain that is allocable to depreciation deducted after May 6, 1997 is taxable.

On December 23, 2002, the IRS issued final regulations for the exclusion of gain from the sale of a personal residence. See Treasury Decision 9030, 2003-8 I.R.B. 495. Prior to the issuance of these regulations, if you sold a home that was partially used for business (such as where there was a home office), you were considered as selling two different properties — property used for personal purposes (the residence) and property used for business purposes (the home office). The gain allocable to the portion of the property used for business purposes was taxable. See Revenue Ruling 82-26, 1982-1 C.B. 114.

The 2002 regulations provide that if the business portion of the property is within the residence (i.e., it is not a separate detached structure), then the taxpayer may exclude, under section 121, all of the gain except the amount of depreciation deducted after May 6, 1997. See Treas. Reg. §1.121-1(d)(1) and (e)(1). Also, see Example (5) at Treas. Reg. §1.121-1(e)(4).

Jbcpa (talk|edits) said:

3 December 2009
Thanks Dave. I agree with you 100%. Great references!

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