Page 3

the Internal Revenue Code a person is considered to use a dwelling unit as a home if the person uses it for personal purposes during the tax year for more than the greater of: 14 days or 10 percent of the total days it is rented to others at a fair rental price, However, if the property is a seco"nd home that is rented at fair market rent for all but 14 days each year and is otherwise treated as an investment property {ff.g., it is depreciated, expenses are deducted and the rental inqlme is repo~ted), it is not considered residential. Likewise, a seasonal camp may be used by the owner for 14 days before it is considered residential. A day of personal use of a dwelling unit is any day that it is used by: {1) You or any other person who has an interest in it, unless you rent your interest to another owner as his or her main house under a shared equity financing agreement; {2) A member of your family or of a family of any other person who has an interest.in it, ~nless the family member uses it as his or her main house and pays a fair rental price; {3) Anyone under an agreement that lets you use some other dwelling unit; or (4) Anyone at less than a fair rental price. {D) Allocation of Gain If a parcel includes both qualifying real estate and residential real estate, the gain must be allocated between the two classes of real estate. For example, if a farm consisting of 200 acres, a farmhouse {the seller's residence or, if the farm is owned by an entity, the residence of an owner of the entity) and a barn is sold and the seller realizes a gain, the adjusted net capital gain should be allocated in the same way as the property value is allocated to the . qualifying and non-qualifying real estate. Thus, if 30 percent of the assessed value is on the housesite, 30 percent of the gain should be allocated to the housesite. The remaining 70 percerit of the gain is eligible for the 40 percent exclusion. If the taxpayer takes the 40 percent exclusion on the eligible gain, the $5,000 exclusion is not available for any part of the adjusted net capital gain. {E) Home Office or Business Gain Gain may also be allocated when a taxpayer has a home office or business in the residence. The burden of demonstrating that a portion of the property is not residential is on the taxpayer. Relevant facts may include how the property is treated on the taxpayer's federal incor:ne tax returns, including form 8829, and any property tax adjustment claims filed with respect to the property. {F) Conversion A residential property that is converted to a nonresidential use prior to sale may qualify for the exclusion depending ·upon the facts and circumstances surrounding the conversion. If the property is converted to nonresidential use within 3 years of the sale it is presumed that the asset is residential, but the presumption may be rebut.ted by the taxpayer. Relevant facts jnclude how long the residence was rented and to whom {e.g. whether the lease is arms' length), when efforts to sell the residence commenced, treatment of the ren~al income 3