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Can I Exclude Part of the Gain On MY Residence if I Rented Part of the Space Considered Part of the Living Area

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Ask the Taxman:  Can I take a capital gain exclusion for my primary residence if I'm renting 67% of the floor-area out and living in the remaining 33%? Entrance and hallways are shared, so it should be considered “within the living area” (exempt), but it's >50%

 

Business or Rental Use of Home- IRS Pub 523

This section applies only if you used a portion of your home for business or rental purposes during your ownership. This type of usage may affect your gain or loss calculations. For more information about using any part of your home for business or as a rental property, see Pub. 587, Business Use of Your Home, and Pub. 527, Residential Rental Property.

Exceptions. The following situations of business or rental usage don’t affect your gain or loss calculations.

Space within the living area. If the space you used for business or rental purposes was within the living area of the home, then your usage doesn't affect your gain or loss calculations. Examples of spaces within the living area include a rented spare bedroom and at-tic space used as a home office. In contrast, business or rental spaces not within the living area affect your gain/loss calculations. Examples of space not within the living area include a first-floor storefront with an attached residence; a rented apartment in a duplex; or a working farm with a farmhouse on the property.

Space formerly used for business or rental. Space that was once used for business or rental purposes may be considered as residence space at the time of sale. A space formerly used for business is considered residence space if ALL of the following are true.

You weren’t using the space for business or rental at the time you sold the property,

You didn’t earn any business or rental income from the space in the year you sold your home, and

You used the space as residence space for 2 years out of the 5 years leading up to the sale.  If your space is considered as residence space at the time of the sale, then your former business usage DOESN’T affect your gain/loss calculations, unless you took or were allowed to take depreciation for use of your home for business or rental purposes. See Worksheet 2, line 5, in Pub 523.

Business or rental usage calculations. If you have used part of the home (not within the home’s living area) for solely business or rental purposes for more than 3 of the last 5 years, you need to make separate gain/loss calculations for the business and residence portions of your property. Make three copies of all pages of Worksheet 2. Label one copy “Total,” one copy “Home,” and one copy “Business or Rental.”

Complete your “Total” worksheet using the figures for your property as a whole. Include the total amount you received, all of your basis adjustments, etc. Include the cost of all improvements, whether you made them to the business space or the residential space.

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