Free Trial: TheSiteFactory.com

PA home sale exclusion (lack of)

Technical topics regarding tax preparation.
#1
Posts:
78
Joined:
1-Jun-2018 1:34pm
Location:
US
Hoping someone with PA experience can confirm what I'm reading. Taxpayer is a PA resident, active military and stationed in AL. Purchased a house in AL, lived in it 3 years then rented it for 2 before selling it. He meets the Federal Sec 121 exclusion for the capital gain but owes tax on the unrecaptured sec 1250 gain / depreciation recapture. However, for PA purposes, since the property was used as a rental it appears he owes state tax on the whole gain?
 

#2
Webster  
Posts:
150
Joined:
5-Nov-2015 5:05pm
Location:
On TPT, of course
That is my understanding on the PA side.
 

#3
Nilodop  
Posts:
13794
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
First, my disclaimer. I'm a PA resident but have not run into this before.
Second, please confirm my understanding of your facts. Does he reside (now) in PA? I assume he does, but after leaving his AL residence he rented it out while living in PA. Is that close? And where if at all does the AL tax on the sale come into play?

But I'm avoiding your question. Not sure what you have read, but both the leaflet they publish on the topic https://www.revenue.pa.gov/FormsandPubl ... ev-625.pdf and the relevant regulation https://casetext.com/regulation/pennsyl ... f-property are unfavorable. Same for PA Schedule 19, https://www.revenue.pa.gov/FormsandPubl ... /pa-19.pdf

Here's the reg. part that seems to apply.
(B) If a residence includes business or rental premises, only that portion of gain on the disposition of the property allocable to the portion used as a residence is subject to the exclusion. Examples include a sole proprietor's residence above the sole proprietor's store, an office in home and a duplex where one unit is rented.
61 Pa. Code § 103.13
There's a modicum of ambiguity. In your facts, the residence doesn't just "include" rental premises, it is the rental premises. And the examples they use lend themselves to allocation. Yours does not, other than allocation based on relative holding periods, which does not appear to be allowed.

However, right after the above excerpted language is this:
(ix) Depreciable property. If, at any time during the taxpayer's holding period, any portion of the principal residence sold was ever subject to the allowance for depreciation, only that part of gain on the disposition of the principal residence that is allocable to the portion of the principal residence which has never been subject to the allowance is subject to the exclusion.
. Well, your facts are that the whole property was (for a while) subject to depreciation EXCEPT, importantly, the land. I think that's a genuine loophole, i.e., it's unintended. So I'd have no problem excluding the portion of the gain allocable to the land. I don't know for sure, but I don't think this has veer been the subject of a case or orhet interpretation. Determining that allocation might be tough, but ...

Short of that, I think PA would argue the entire gain is taxed. They'd say it lost its identity as a residence when it got rented out.
 

#4
Posts:
78
Joined:
1-Jun-2018 1:34pm
Location:
US
Webster & Nilodop - thank you for your replies. Taxpayer's home of record has been and remains PA, he has been deployed overseas since leaving AL and the house was rented while he was deployed. He owes some tax on the AL non-resident return which he receives a credit for on the PA return. PA doesn't tax his military pay since it is earned out of state which is why he has kept PA as his home of record.

Nilodop, thanks for pointing out the resources - I read the PA leaflet and regs and reviewed PA Sch 19 before posting and was somewhat unclear. Schedule 19 doesn't really fit this fact pattern since it wasn't a split use property during the time it was his residence. However, since the whole house was depreciated during the time it was a rental I read the regs to say that the whole house is not eligible for the exclusion. I didn't think about applying the exclusion to the land... I'll look into that, thank you for mentioning it.
 

#5
Pitch78  
Posts:
584
Joined:
22-Apr-2014 7:17am
Location:
Oklahoma City
https://revenue-pa.custhelp.com/app/ans ... Fresidence

Do I have to pay income tax on sale of my home/principal residence?

Under a law that took effect on Jan. 1, 1998, most taxpayers are not required to pay personal income taxes on the gain from the sale of their principal residence.

Generally, homeowners who owned and used their home as their principal residence for at least two of the five years prior to the date of sale will qualify for the exclusion on a sale of their home.

However, taxpayers are required to report the gain if they sold their home within two years of selling their previous residence. If the sale of their home was required by unforeseen circumstances (change of employment status or health) the gain could be excluded.

Any portion of the residence used for rental purposes with the intention of making a profit is subject to the allowance of depreciation and therefore does not qualify for the exclusion. The proportional share of gain must be reported. For example, a taxpayer lived in their primary residence for ten years. The taxpayer relocated to a different state for employment purposes and decided to rent his PA residence while working in the other state. Any gain from the sale of the home, minus depreciation, is taxable since the residence is currently being used for rental purposes. If the approximate gain from the sale of the residence was $11,000 with $9,000 of depreciation the taxpayer would report $2,000 as the taxable gain from the sale.
 

#6
Posts:
78
Joined:
1-Jun-2018 1:34pm
Location:
US
"Any gain from the sale of the home, minus depreciation, is taxable since the residence is currently being used for rental purposes. If the approximate gain from the sale of the residence was $11,000 with $9,000 of depreciation the taxpayer would report $2,000 as the taxable gain from the sale." - Assuming "depreciation" means accumulated depreciation, which it appears to based on the context, this Q&A doesn't make sense to me. The PA schedule D uses adjusted basis which is defined in the PA regs as cost minus accumulated depreciation. This Q&A implies that you calculate the gain on the sale using basis ex accumulated depreciation.
 

#7
Posts:
161
Joined:
10-Jan-2015 4:30pm
Location:
Virginia
My thinking would be that when the home was being rented the depreciation expenses reduced the PA state taxes in the year he filed in PA for the years the property was being rented in AL, you would argue that he should report the recapture in PA because that is where he got the benefit in PA in reducing his PA taxes.

So what if he rented the property for say 10 years and lived in VA, TN, GA and now in the year of sale is in PA. Why should PA be allowed to tax the recapture of the depreciation that was used to reduce the tax in other states.

Also this does not consider the 2nd rule as to the gain to be reported after 2008 for the period the property was used as a rental property. Wouldn't AL argue that you were in the rental business in AL during this period and AL wants to tax the appreciation of the property during the rental period after 2008 "non qualified used".

I have a similar situation of a person who lived in VA during the rental period moved into the MD property for 2 years and then move to FL and sold the property Why should MD get to tax any of the recapture, since the taxpayer never had the benefit of the depreciation deduction in MD, but benefited from the depreciation on his VA return. Now he lives in FL and would like to argue that he is not going to report any recapture in VA nor MD.

What do you think?
 


Return to Taxation



Who is online

Users browsing this forum: belle, Google [Bot], Nilodop and 66 guests