Can I claim a primary residence exclusion for an apartment if I rent others connected to it?

August 12, 2011

From:  Eugene
Date:  16 Apr 2009

Mr. and Mrs. X bought a rental property in 1978, and have used one of four apartments as a summer residence. They will make it their permanent residence for two years prior to selling it. Can they continue to rent the other units while claiming it as their principal residence? It has been fully depreciated since 2003.

Thank you for providing this helpful information.

Eugene

Answer

Date:  6 May 2009

Hello Eugene,

They can rent the units while living in one. The exclusion for sale of a principal residence won't apply to the rented units. The gain will have to be prorated for the personal residence versus the rental units. (Treasury Regulations Section 1.1212-1(e).)

Also, the tax law was recently changed so that periods of use other than as a principal residence after 2008 will reduce the exclusion, and that the amount of gain up to depreciation taken for periods after May 6, 1997 isn't eligible for the exclusion.

Good luck!
Mike Gray

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