John and Jane are divorcing. They own a property they have rented out
for the past ten years. As part of the divorce settlement, Jane moves into
the rental property, making it her primary residence. Five years later,
Jane decides to sell the property.
Step-by-Step Analysis:
Property History:
Rental period: 10 years
Primary residence period: 5 years
Total period of ownership: 15 years
Capital Gain Calculation:
Assume the property was purchased for $200,000 and sold for
$500,000.
Total gain: $500,000 - $200,000 = $300,000
Non-Qualified Use Period Calculation:
Non-qualified use period: 10 years (rental)
Total period of ownership: 15 years
Depreciation Recapture:
Assume Jane claimed $50,000 in depreciation deductions during the
rental period.
The $50,000 must be recaptured and taxed as ordinary income.
Non-Excludable Gain = (10 / 15) × 300,000
In this example, $200,000 of the gain is attributable to the non-qualified
use period and is subject to capital gains tax. The remaining $100,000 of
the gain may be eligible for the capital gains exclusion, assuming Jane
meets the ownership and use test requirements.
CONSIDER THE FOLLOWING EXAMPLE
07 DIVORCE REAL ESTATE & MORTGAGE JOURNAL
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