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Frequently Asked Tax Questions And Answers

Keyword: Sale or Trade of Business Property


10.1 Capital Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.)

I lived in a home as my principal residence for the first 2 of the last 5 years. For the last 3 years, the home was a rental property before selling it. Can I still avoid the capital gains tax and, if so, how should I deal with the depreciation I took while it was rented out?

If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to the maximum dollar limit. However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. This gain is reported on Form 4797 (PDF), Sale of Business Property. If you can show by adequate records or other evidence that the depreciation allowed was less that the amount allowable, the amount you cannot exclude is the amount allowed. Refer to Publication 523, Selling Your Home, and Form 4797 (PDF), Sale of Business Property, for specifics on calculating and reporting the amount of gain.

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11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture

I have a home office. Can I deduct expenses like mortgage, utilities, etc., but not deduct depreciation so that when I sell this house, the basis won't be affected?

If you qualify to deduct expenses for the business use of your home, you can claim depreciation for the part of your home that is a home office. Generally, the part of your home that is a home office is depreciated over a recovery period of 39 years using the straight line method of depreciation and a mid-month convention. If you do not claim depreciation on that part of your home that is a home office, you are still required to reduce the basis of your home for the allowable depreciation of that part of your home that is a home office when reporting the sale of your home. For more information, refer to Publication 587, Business Use of Your Home.

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11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges

What form(s) do we need to fill out to report the sale of rental property?

The gain or loss on the sale of rental property is reported on Form 4797 (PDF), Sale of Business Property. Form 1040, Schedule D (PDF), Capital Gains and Losses, is often used in conjunction with Form 4797. For further information, refer to Publication 544, Sales on Other Disposition of Assets, Publication 550, Investment Income and Expense, the Instructions to Form 4797 (PDF), Sale of Business Property, and the Instructions to Form 1040, Schedule D, Capital Gain and Losses.

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What forms do we file to report a loss on the sale of a rental property?

The loss on the sale of rental property is reported on Form 4797 (PDF), (Sale of Business Property) as ordinary loss.

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