From what I understand, we need to report the sale of Home A in the Sale of Business section, rather than the Sale of a Home section, even though it was our main home at the time we sold.
1. Is this correct that will be reported in the Sales of a Business section?
Yes. This is because you are required by law to recapture all depreciation you took on that property while it was a rental. You will pay taxes on that recaptured depreication, and it will increase your AGI.
2. If yes, are the steps listed below correct? It seems too simple.
Yes. However, I see many folks that do not recapture "ALL" of the depreciation taken. What you have to do is on the tax return for the last year you rented it and converted it to personal use, you need to IRS Form 4562's. THere are two of them and they both print in landscape format. The primary one you're interested in is titled "Depreciation and Amortization Report".
You need to add up all the amounts in the "prior years depr" column and the "current year depr" column. The total of both columns will be the total amount of depreciation you have to recapture.
Now *BE CAREFUL* because on the first 4562 I mentioned, you may have a section for "amortized costs". Those are "NOT" depreciation amounts. They are flat out deductions. Your amortized costs are deducted (not depreicated) over the life of the loan. Therefore, any remaining amount of amortized costs not yet deducted are added to your cost basis of the property. This reduces your taxable gain accordingly.
I certainly don't want to complicate this, but the interview does not ask how long the property was used for personal use and business use.
Because based on the dates you provided, it's rather obvious you don't qualify for the capital gains tax exclusion. So there's no need to ask.
It seems like the IRS will notice that we owned the property for 14 years, and be curious why we took depreciation for only 4 years while it was a rental, or worse demand 14 years of depreciation.
Perhaps you mistakenly think the IRS doesn't have a complete history of your tax life since you filed your very first return when you got that first job as a busboy? Don't worry about it. I can assure you, they know more about your tax life than you do. 🙂
3. Here are my proposed steps, please review:
Everything is spot on for reporting the sale of Home A.
Here's a quick synopsis of how the program handles the numbers.
You will be asked in the Sale of Business Property for all depreciation taken. That amount is basically added to your sales price. Additionally, that amount will be taxed at a maximum tax rate of 25%. So even though the depreciation arecapture dds to your AGI, if your tax bracket is below 25% without the depreciation recapture, it will not exceed 25% with the recapture.
If your tax bracket is over 25% without depreciation recapture, Then it will change your "step up" to the next tax bracket by the amount of recaptured depreciation, thus keeping the recaptured depreciation out of the tax bracket above 25%.
