8679 / Is a taxpayer permitted to exclude gain on the sale of a principal residence used partially for business purposes if the business portion of the property is not separate from the taxpayer’s dwelling unit?

Example: Kacey is a lawyer and has used three rooms in her residence as her law office for a seven year period. Over this period, she claimed depreciation deductions totaling $10,000. Later, she sells the house for a $30,000 gain. She has no other capital gains or losses for the year. She must recognize $10,000 of the gain (an amount equal to her depreciation deductions) but may exclude the remaining $20,000 because she is not required to allocate gain between residential and business use property under Treasury Regulation Section 1.121-1(e)(1). If Kacey had not been entitled to claim depreciation deductions with respect to the business use of the house, the entire $30,000 of gain would be excluded from gross income.²

1. Treas. Reg. § 1.121-1(e)(1).

2. Treas. Reg. § 1.121-1(e)(4), Ex.6.