Work-related move and short-term capital gains

[kman22]

What is the name of your state?What is the name of your state?My state is CALIFORNIA.

Here is our situation:
We (a married couple) own a duplex as a tenancy in common with another couple living in northern California. We lived in our unit for 1 2/3 years, and then had to move to southern California for a new job. We could not force a sale of the duplex because our TIC agreement stated that neither party can force a sale prior to 3 years from date of purchase. So, we rented out our unit, with the hope of selling it in a year's time.

So, my question entails the 2-year rule as it pertains to work-related moves. I know that, if the sale of property is due to employment-related moves, the exemption on capital gains is prorated by the amount of time lived in the property (in our case it would be 5/6 x $500K). My question is this: How proximate in time does the employment-related move need to be to the sale of property? Is there a time restriction at all, or are there other considerations that apply? And, do factors such as our TIC agreement have any bearing on the question of time between work-related move and sale of property?

Based on the answer, we can either sell the property after the renter moves out, or will need to occupy the unit for another 4 months to avoid capital gains.

Many thanks in advance, and merry christmas/happy new year.

 

[abezon]

The general rule is that the sale must occur within 1 year of the move to be considered job-related. I think your agreement would be a great reason to extend the 1 year rule, but I'm not your IRS auditor. To be absolutely safe, at least one of you should occupy the place for another 4 months. If the gains are over $250,000, you should both occupy the place for another 4 months.

BTW, you do not have to claim depreciation, as long as you save tax returns so you can prove that you have not claimed any. (If you don't save the proof, the IRS will make you "recapture" the depreciation allowable, whether you claimed it or not.) Depending on your tax brackets the next 2 years, you may want to forego depreciation deeuctions.

I take it your rent would not cover the mortgage & you won't have the cash to kick in the difference each month? Otherwise, you might consider keeping the place as a rental & letting 30 strangers buy you a house. Even if you have to kick in $$ each month, it may still be a good investment. Talk to a financial advisor & real estate agent about the market trends.

 

[kman22]

Thanks! That is helpful advice indeed. Regarding depreciation, am I right that in California the tax on the recaptured amount is 34%? That would certainly tip the scales away from depreciating now.

 

[LdiJ]

Thanks! That is helpful advice indeed. Regarding depreciation, am I right that in California the tax on the recaptured amount is 34%? That would certainly tip the scales away from depreciating now.

I am not a believer in depreciating rental property anyway.....unless there is no mortgage on the property. When there is a mortgage, you rarely get any real value from the depreciation, as it nearly always puts you into a loss position......that ends up being carried forward ad infinitum.

 

[kman22]

I am not a believer in depreciating rental property anyway.....unless there is no mortgage on the property. When there is a mortgage, you rarely get any real value from the depreciation, as it nearly always puts you into a loss position......that ends up being carried forward ad infinitum.

Is depreciation mandatory or optional? I tried researching this topic, and can't find a clear answer on it. Is it the case that if you are a professional investor it is mandatory, but optional if you are simply renting out a property in which you once lived (and may live in again)?

 

[abezon]

Congress drafted the capital gains statutes to require taxpayers to recapture depreciation "allowed or allowable" unless the taxpayer can show "through adequate records" that the actual depreciation claimed was less than that allowable, in which case only the depreciation allowed must be recaptured. You'll find such phrasing in both sections 1250 & 1245.

BTW, EVERY IRS pub you find says you have to recapture depreciation allowed or allowable, and fails to mention the huge exception to that rule. Most IRS auditors don't even know this exception. They read IRS pubs, not the tax code.

Here's the pertinant language from section 1250:

1250(b)(3)Depreciation adjustments
The term “depreciation adjustments” means, in respect of any property, all adjustments attributable to periods after December 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168 (as in effect before its repeal by the Tax Reform Act of 1976), 169, 185 (as in effect before its repeal by the Tax Reform Act of 1986), 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, or 193). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed.