“We’ve lived in our home for almost 30 years. Now we’re moving and have it under contract for sale. Our problem is our property has our home and also a small shop – all on the same deed. Over the years we’ve made a nice side income from the shop.
Our sales price is $435,000 which means we’re well under the limit for selling without paying taxes.
I’m worried the shop is going to trip us up?”
Income taxes certainly can trip us up – and this is a good example.
The IRS will likely view your sale as two sales. The first is your home. The second is your shop. The first appears to be income tax free as it is under the $500,000 of residence profit a couple can realize and pay no capital gain taxes. The second may very well trip you up.
If you treated your shop as the base of operations for your business (tax deductions, depreciation, etc.) you will need to report that separately. You will need to determine (appraisal most likely) the portion of the sales price ($435,000) should be attributed to the shop. If, for example, that value is $150,000 you will need to report that as the proceeds from the sale of a commercial/investment property. To the extent the $150,000 exceeds the cost basis attributed to your shop – taxable gain!
Do not consider this a DIY project! Work with an experienced tax professional and document your numbers as completely as possible. Done correctly, this shouldn’t be terribly painful.
If you have questions or comments, please send them to Gene@AskMtM.com