Expert: Dick Dennis - 1/29/2010

Question
QUESTION: Dear Mr. Dennies,
When one sells a 2-family house one-half of which was occupied by the owner, and the second half rented out (for 20 years), what is the Federal and the State (Massachusetts)capital gain rates for the rented portion of the house, and for the excess of $500,000 for the owner-occupied portion of the house.
Thank you very much for allowing your readers to ask you for an advice.
Sincerely,
Mike

ANSWER: When you own a two-family dwelling, Mike, you treat the rental part just like any business . . . in every way. Having a rental for income IS a business and you should treat the tenant just like a customer . . . firm but fair. As for the capital gains, therefore, the rental part of the property is income and it must be put on a depreciation schedule. Talk to your tax consultant which is the best schedule for your income.

Even if the property is not demarked with separate walls, you still treat the property as if it was. Now, if you are selling the property and you have not put the rental part of the property on a depreciation schedule . . . well, Mike, you have a bit of an IRS problem coming your way. If indeed you did not have a depreciation schedule, you have to go back all those years and make it up to the IRS. Another reason to sit down with a tax attorney or certified public accountant BEFORE you sell the property.

When you do your tax return next year (for this year after selling the property) you are going to be asked questions regarding selling the property. Further, if by some chance you have not reported the tenant rent as income down through the years, you may have to resurrect all your returns for ALL those years to prove to the IRS you did it legitimately. You really need to go see a tax attorney right away, Mike, that is if I understood your question correctly. I do wish you well.

Dick Dennis
dixiedee13@aol.com

---------- FOLLOW-UP ----------

QUESTION: Thank you very much, but that was not the question. The rental portion of the property was dully depreciated, as well as all repairs, improvements, etc., etc.
The only question I have is about the factual Federal and State (Massachusetts)tax rates (as, for example, 25% Federal and 4% State of Massachusetts)on the capital gain for the renting portion and on the difference between the actual capital gain of the owner occupied portion and the $500,000 allowance. Are these two sets of tax rates (for Rental and Owner Occupied portions of the property) the same, or different, and what are their actual numerical values?
Sincerely,
Mike

Answer
They are different, Mike. The %500,000 (for husband and wife, filing jointly) can be used only for residential (their primary home) property), providing they have lived in their home in two of the last five years. The rental portion is treated totally different. I already gave you a hint as to how it is treated. As for what tax bracket you are in, there is no way I could know that without knowing your income and your life style. That is what a CPA or tax attorney can do for you. They know exactly what tax bracket you're in. I wish you well.

Dick Dennis