If you sold a home that was used partly as your personal residence and partly as a rental property, the tax treatment depends on how the rental portion was being used at the time of the sale. In some situations, you can report the entire property as the sale of your main home. In others, you'll need to split the transaction between a personal residence sale and a business property sale.
What If the Rental Space Was No Longer Being Rented When I Sold the Home?
A portion of your home that was previously used for rental or business purposes may qualify as residence space at the time of sale if all of the following are true:
- You were not using the space for rental or business purposes when the property was sold.
- You did not receive any rental or business income from that space during the year of sale.
- You used the space as part of your residence for at least 2 years during the 5-year period ending on the sale date.
If all three requirements are met, you can generally report the sale as the sale of your main home rather than splitting the transaction into separate personal and rental sales.
Important: Depreciation Recapture Still Applies
Even if you qualify for the home sale exclusion, you must still recapture any depreciation that was allowed or allowable while the property was used as rental or business property.
Depreciation recapture is generally taxed as ordinary income and cannot be excluded under the home sale exclusion rules.
How Do I Report the Sale as My Main Home?
Complete the Sale of Main Home Worksheet and enter all required information, including any depreciation claimed during prior years.
It's helpful to have copies of prior-year tax returns and depreciation schedules available before completing the worksheet.
To access the worksheet:
- Federal
- Income (Select My Forms)
- Investments
- Sale of Main Home Worksheet
The program will calculate any eligible home sale exclusion and determine the taxable portion of the gain, including depreciation recapture.
What If I Don't Qualify to Treat the Rental Portion as Part of My Residence?
If part of the property remained dedicated to rental or business use and does not meet the requirements above, you generally must treat the residence and rental portions as separate properties for tax purposes.
This often applies when a portion of the property:
- Was used exclusively for rental or business purposes,
- Was physically separate from the living area, and
- Continued to be used as rental or business property leading up to the sale.
In these situations, you'll need to calculate gain or loss separately for each portion.
Residential Portion
The personal-use portion is reported as the sale of your main home.
If you meet the ownership and use requirements, you may qualify to exclude up to:
- $250,000 of gain if filing individually
- $500,000 of gain for many married couples filing jointly
You must allocate a portion of the sales price and cost basis to the residential portion based on a reasonable method, such as square footage.
Report this portion using the Sale of Main Home Worksheet.
Rental Portion
The rental or business-use portion is reported separately as the sale of business property on Form 4797.
For this portion:
- Any depreciation claimed must be recaptured.
- The adjusted basis used for depreciation becomes the basis for the business sale calculation.
- A portion of the sales proceeds must be allocated to the rental area using the same allocation method used for basis.
The gain attributable to the rental portion generally does not qualify for the home sale exclusion.
For detailed allocation methods and examples, refer to IRS Publication 523, Selling Your Home.
How Do I Report the Rental Portion on Form 4797?
To report the business or rental portion of the sale:
- Federal
- Income (Select My Forms)
- Less Common Income
- Sale of Business Property (Form 4797)
Enter the information for the rental portion separately from the personal residence portion.