The plain language of Section 121 indicates that the personal residence must be "owned and used
by the taxpayer as the taxpayer's personal residence", and in your client's fact pattern, the taxpayer changed from H&W as TBE to a partnership. The partnership cannot claim the exclusion on IRS Form 1065 because the partnership is an investment entity and never itself used the property in question as a personal residence.
------------------------------
Matthew E. Rappaport, Esq., LL.M.
Vice Managing Partner
Chair, Taxation Group
Falcon, Rappaport & Berkman PLLC
(516) 558-3377
mer@frblaw.com------------------------------
Original Message:
Sent: 02-01-2022 01:27 PM
From: Paul Herman
Subject: Sec 121 exclusion for residence owned in Partnership?
Hi All. Here is the case:
Husband and wife bought a home in 2014. Used it as their residence until June, 2020.
In June, 2020, husband and wife put property into an LLC (partnership) at which point they rented it out. They are only members. They rented it out for the remainder of 2020 and reported rental income on the 1065. Also rented it out for most of 2021.
In December, 2021, they sell it. Deed is in the name of the LLC.
They meet the ownership and use tests.
Query... Can they take the principal residence exclusion?
My research seems to indicate because the LLC had business (i.e. rental) income from the property, it may not be eligible for the exclusion.
Thanks much for your thoughts.
Paul Herman
Herman & Company CPA's, P.C.
White Plains, NY 10605
(914) 400-0300, Ext 10