Dick Adams wrote:

- quote -

As it will be his residence for purposes of the section 121
exclusion (else why is he moving into it), then all he has
to worry about is depreciation. Whether he can ignore the
pre-May 1997 depreciation as it wasn't a residence (i.e.
home office) at the time but a 100% business property, I'd
have to research. Being that his placed-in-service date
would be in the late 1960's, I would suspect that he might
have fully depreciated the property before 1997.

If one cannot ignore the depreciation, then his adjusted
basis [in the structure] is probably zero, so ALL of the
sales price will have to be recognized.

Maybe someone else can build upon my thoughts to lead to a
correct answer.

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"Dick Adams" <rdadams[at]smart.net> wrote:

- quote -

I'm assuming they plan to own and reside in the former
dental practice at least 2 full years. If so, assuming MFJ,
they can exclude up to $500,000 of any profit made on this
house with one caveat....they have to recognize depreciation
recapture since May 1997. Since they can do this every two
years, the same applies to the house they now live in too.

Mike Lewis, CPA

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Dick Adams posted:

- quote -

The short answer is, "You can exclude up to $250,000 of the
gain from your income ($500,000 on a joint return in most
cases). And, to exclude the gain under these rules, you
must have owned and lived in the property as your main home
for at least 2 years."

Now, there are some murky issues regarding excluding parts
of the gain related to business use of the property, and
this depreciation was specifically barred after May 6, 1997.
However, it is not immediately clear how or whether that
would apply when the property was exclusively used as a
business facility.

IMO, it _might_ be possible for the business to dispose of
the property by selling it for $1 to the proprietor and
spouse. Assuming that would establish a virtually zero cost
basis at the time of the move-in, two years later the short
answer above might apply again. It certainly would if your
friend had bought another house, and then re-sold it after
occupying it for two years.

Hope this helps.

Bill

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Dick Adams wrote:

- quote -

The maximum exclusion is $500,000 of gain on the sale of the
residence. Assuming the depreciation in question was all
incurred prior to May of 1997, none of it would be subject
to tax if the residence qualified under Section 121. In
that case, the maximum potential tax would initially be 25%
of the depreciation (the unrecaptured Section 1250
recapture) and then 15% of the excess, as well as any state
tax involved, presuming the state in question follows
federal law.

However, since Congress has fallen in love with phaseouts,
the full answer may be a lot more involved than that, and
it's possible the savings might be greater due to the fact
that being able to exclude the amount means it also won't
impact adjusted gross income. So the answer is--who knows
<grin> , at least without running the numbers on the return
they would expect to file.

--
Ed Zollars, CPA
Phoenix, Arizona

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"Dick Adams" <rdadams[at]smart.net> wrote

- quote -

Ok, the house he purchased 35 or so years ago will sell for
the $250,000/$500,000 gain exclusion. No problem.

He converts the office to his residence with a low
depreciated basis. Any gain on that sale will be partly
taxable based on the depreciation taken from May (what was
that 2000?), the enactment date of the newest law on the
sale of your home. *Some gain will be excluded based on if
they stay there for two years before they sell it.

--
Paul A. Thomas, CPA
taxman at negia.net

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40 years ago on the advice of an Accountant who is long
since deceased, a Dentist purchased a house to use as a
primary residence and an office. About 35 years ago
he purchased a separate primary residence and began
fully depreciating the office property.

He is now selling his practice with a one-year lease on
the office after which time he and his wife plan to sell
their home and move into the office as their primary so
it will qualify as their primary residence, then sell it
and move South.

He asked me if this was kosher. My response was "You need
to consider the difference between the rehab cost of making
the office acceptable as a residence and the tax savings
of selling it as a primary residence plus your ability to
recover the rehab costs on sale. And there also the
qualitative cost of spending the next three years in the
land of the damnyankee snow versus the pleasure of living
in the South."

Since I do not do taxes, I have no idea of the maximum tax
savings on the sale of a primary residence. How much?

Dick

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