Tax Tip 350: Trap - Selling a property within 12 months of renting it out

Yes. There is no specific test for the "production of income"rule. However you dont want it to be attacked either. A fee paid by someone of Airbnb is arms length. A $10 fee may seem contrived and even be seen as a private arranegement or a contribution to assist board & lodging for a friend.

You are confusing what would be a "first use to produce income" which is based on a lease for the whole property v's that of earlier producing rent or other forms of income for a part of the property and for for a part of the time while Bart still lives there. Bart may even try to operate a business with Milhouse for a short time and that meets the test for stopping s118.192. Home merely needs to be a place of business.

 

I'm probably not explaining myself well. I get that under these circumstances s118.192 does not apply so the value is not reset.

But, using s118.185/s118.190, on top of the 1 / 2922 = 0.034223% of the taxable amount (there was a typo in your fist post, it was stated 0.00034223%), should not Bart also be taxable for an additional 30 x 11 / 2922 = 11.29% if he rents out the property for 11 months before selling (assuming for simplicity 11 months of 30 days)?

Also, why do you use 200k as CG to calculate the taxable amount, which is based on the reset value, shouldn't it be 700k if you use s118.185/s118.190?

 

Are you referring to my example in the first post? Cost base is reset to market value at the date it is worked out which would be $1mil. He is taken to have acquired it at this point for this amount. So if he sells it for $1.2mil that is a $200,000 gain, ignoring the other cost base expenses (but cost base expenses at purchase won't apply)

 

Hi Terry, no I was referring to the case when Bart rents out one room for one night before moving out and renting out the whole house for 11 months, as per Paul’s suggestion. Your example is perfectly clear.

 

I will leave that one for Paul