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, 2007, 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 would be taxed at a 25 percent rate since it represents deprecation that must be recaptured, and the remainder would be taxed at a maximum rate of 15 percent.
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