@squirrellandlord wrote:
It also appears that the rate applied to depreciation recapture is typically 25%, which would be higher than the marginal rate we would pay now if we were not to deduct depreciation. Is that correct?
No. It is taxed at your regular tax rate, UP TO 25%.
@squirrellandlord wrote:
How can I learn more about this? In pub 523, under Business or Rental Use of Home, "space within the living area" is defined without reference to "dwelling units". Instead, it gives some examples:
"Examples of spaces within the living area include a rented spare bedroom […]. Examples of space not within the living area include a […] rented apartment in a duplex".
There isn't any one clear and easy-to-read spot to read about it. But as the examples show, if it is PART of your home (your living area), then the exclusion applies. If it is a completetly separate "dwelling unit" (a separate apartment), then the exclusion does not apply to that. Think of an apartment building with many "units". Each is a separate living quarters with their own entrances, kitchens, etc.. Just because they share the same building does not mean they are all considered as one 'home'.
@squirrellandlord wrote:If it's the case that:
ii) We must pay capital gains tax on ~25% of our house (the basement), as a result of having rented it out; and
iii) We cannot apply a loss from the rental 'business' (which I foresee, since the apportioned mortgage interest and depreciation could exceed our rental income, esp. with covid) to our personal taxes, such that our personal taxes also go up (vs. applying 100% of the mortgage interest and property tax deductions to our personal taxes); and
No. If it is a separate "dwelling unit", then you are allowed to take any applicable losses, IF they are allowed with the Passive Loss Rules (and if the Passive Loss Rules do restrict it, the loss will be carried forward until they can be eventually be used, which includes when the house is sold).
