Assessing the Tax Consequences of a Sale of Rental Property with Varying Degrees of Personal Usage

The sale of rental property involves a host of tax reporting issues. The computation of gain or loss becomes more complicated when the property also qualifies as a personal residence eligible for the Section 121 exclusion. These tax results can vary significantly depending on the degree of personal usage for such property. Six cases illustrate the gain computations for situations ranging from the sale of a property with 100% personal usage to the sale of a property with 100% rental usage. Before examining these computations, it may prove useful to examine two key questions related to the sale of a rental property: 1. Is a rental property a trade or business? 2. Is the rental property "mixed-use property"? Although the tax law is far from clear, it appears that, with few exceptions, basis, sales proceeds and gain or loss must be allocated between rental and personal in order to properly compute gain or loss.