Question: I used a part of my house as an office for about 10 years. When I retired seven years ago I discontinued that use. I would now like to sell; but the IRS says since part of the house was used as an office in the past, I will have to "split" the capital gain and pay tax on the percentage that applied to the office. What is your interpretation?
Answer: You didn't say if you plan to roll over the proceeds from the sale into a new residence or intend to claim the over-55-years-old exclusion of up to $125,000 of the gain. (I assume from your letter that you are old enough to qualify.)
In Revenue Ruling 82-26, the IRS held that in the case of a rollover, no allocation is required unless the business use qualifies for a tax deduction, under Section 280A (c) (1) of the Code, in the year of the sale.
That is, you do not have to handle the transaction as two separate sales -- the residence and the office -- if use of part of your residence for an office terminated at any time prior to the year in which you sell the house.
I could find no ruling on the over-55 exclusion similar to this one covering deferral of gain on a rollover. But the reasoning in this ruling leads me to believe that the same conclusion would follow.
So I am quite confident that for the facts as you stated them you will not be required to make an allocation of gain. Since you are not maintaining an office in your home in the year of sale, the entire gain (up to the $125,000 ceiling) may be excluded.
Caution: In either case -- that is, rollover or over-55 exclusion -- you will have to reduce your cost basis in the residence by the total amount of depreciation you claimed over the 10 years you did maintain the office.
Q: I have a problem to which the IRS has given me different answers. I started a Keogh account in January 1978 when I was 66 years old. I reached 70 1/2 this year and must begin withdrawals from the account. I would like to take it in a lump sum and use 10-year averaging to reduce the tax -- but to do so the plan must be five years old. Can I take distribution of the minimum in 1982, then take the balance in 1983 and use the 10-year method?
A: Sorry, there's no way out of this box. In order to qualify for 10-year averaging, the entire lump sum must be distributed in one tax year.
And there is no way you can postpone at least the minimum initial distribution beyond the year in which you reach age 70 1/2 (1982).
I don't think this is an unreasonable requirement, either. Take your case: You would have deferred the tax on the amount of your contribution for each of the four years 1978 through 1981. Then you could pull the whole thing out and pay a much lower tax based on 10-year averaging.
You can still take the entire distribution this year and use normal (Schedule G) income averaging. If the contribution you made each year was fairly large and your income (other than the distribution) is still substantial for 1982, you might salvage a small tax saving that way.
On Sept. 13 I wrote about the use of imputed interest in establishing an equivalent sales price for property when zero or below-market financing is part of the deal.
To clarify what I said, those rules apply only to individual homeowners. If the seller is in the business of building, buying or selling houses, he may not use this technique.
Because the house he sells is part of his "stock in trade," all of the profit is ordinary income rather than capital gain anyway. So there is no need to split out the interest portion, and he reports the contract selling price.
But an individual buyer is permitted to apply the imputed interest rule in any case, even if he buys from a builder or developer. Thus the buyer may claim an interest deduction for a part of each mortgage payment even though the seller is not reporting the equivalent interest income separately.