We sold our primary residence in 2020. We lived in the house over 2 years out of the last 5 prior to the sale and have owned it for 20+ years. We should qualify for the $500,000 exemption for sale of primary residence.
In 2015 we rented the house for a few years while we travelled, and took depreciation deductions. The renters moved out 8/1/18 and we moved back in 8/1/18. We lived in the house until the end of November 2020 when we sold the house.
I understand we need to reduce the basis of the house by depreciation taken, which increases our gain. However, the gain is still way under the $500,000 exclusion when you sell your primary residence. Since I reduced the basis by the amount of depreciation, that is in effect recapturing the depreciation. Why does TurboTax add that same depreciation into our ordinary income. Taxing it twice in a way. Turbo Tax is reporting the depreciation amount on Schedule D along with our other Capital Gains, but then that amount is pulled out during the tax calculation and taxed as regular income. Why? I already recaptured the depreciation by subtracting it from our basis, thereby increasing profit. The profit is still below the $500,000 exclusion amount.
If the depreciation is recaptured twice, both by reducing basis and taxed as ordinary income, does CA Franchise Tax Board (FTB) also tax the same amount? I asked in an FTB Chat whether they recaptured depreciation if the gain is under the $500,000 exclusion. Their response was "We do not include that as taxable income because it is still within the excludable amount. You can make an adjustment on Schedule CA". TurboTax transfers the depreciation amount as taxable to the California return. So, which is correct?
CA conforms to IRS Sale of Residence rules. Doesn't that mean it is also not taxed on the Federal return?
Thank you,
Sue
