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My father currently rents a house from me that I own and moved out of in January of 1998 after having lived there since 1985. I still run my business from the basement (about 50% of the house). We want to maintain this situation indefinitely, but would love to also benefit from the capital gain tax exclusion whenever I decide to sell the house. Since we are approaching the end of the 2 yr./5 yr. exclusion provision (Jan. of 2001), is there some way we can legally keep the exclusion in effect without having to get rid of the house, thereby evicting my father and my business? Or can I sell the house (or just the "residential half") to my father or some other friendly party who would allow us to maintain the status quo? What would be the legal and tax implications?"
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My father currently rents a house from me that I own and moved out of in January of 1998 after having lived there since 1985. I still run my business from the basement (about 50% of the house). We want to maintain this situation indefinitely, but would love to also benefit from the capital gain tax exclusion whenever I decide to sell the house. Since we are approaching the end of the 2 yr./5 yr. exclusion provision (Jan. of 2001), is there some way we can legally keep the exclusion in effect without having to get rid of the house, thereby evicting my father and my business? Or can I sell the house (or just the "residential half") to my father or some other friendly party who would allow us to maintain the status quo? What would be the legal and tax implications?

This is one of those situations in which I would recommend that you hire an advisor. There are too many issues and variables here for us to give you good advice. There's probably something you can do, but to find out what and how, you and your father need to get in touch with a tax advisor ASAP.

TMF ExRO
Phil Marti
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Even if you sell your home now, because part of your main home was used for business purposes, the IRS requires that you treat the sale of your home as the sale of two distinct assets. The gain attributable to personal use may qualify for the exclusion for sale of your main home. The portion of the gain attributable to business use (50% for basement) is considered taxable sale of a business asset. However, if the basement was used for personal use for 2 or more of the last 5 years, that portion of the gain from sale may qualify for exclusion from income also.
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