@smitchells wrote:
From what I read "nonqualified use" only applies if our original use on the home was a rental, and later we converted to a personal residence.
If you decrease basis by depreciation, increasing your gain (which you are taxed on if over $500,000), plus you recapture that same amount and pay an additional 25% tax on that as ordinary income (even if gain is way under the $500,000), you are basically paying tax on the same amount twice.
It feels like double taxation to me.
Anyways, is this accurate? Is depreciation both subtracted from basis AND added to ordinary income? I was hoping I was doing it wrong!
Does California conform and tax it the same?
Thanks
Nonqualified Use applies if it was a rental (or anything other than your Principal Residence) before it was your Principal Residence. It does not matter what the "original use" was. You said you moved back into the home in 2018 (after it was rented), and that triggers it to be Nonqualified Use.
As I said before, it is not taxed twice. Maybe an example will help:
Let's say you bought the home for $300,000, took $100,000 of depreciation, and sold it for $500,000.
Your total gain is $300,000 (Sales Price of $500,000 minus your Adjusted Basis of $200,000). OF that $300,000 gain, $100,000 is Unrecaptured 1250 Gain (tax due to the depreciation), and the other $200,000 is taxed as long-term capital gain.
So even if you had $0 depreciation, you would pay tax on the $200,000. But because you had $100,000 of depreciation, you pay tax on that $100,000 when it is sold. It is only taxed once.
