Capital Gains and Depreciation Recapture Taxes

[LK83]

I've owned a condo for about 15 years as my primary residence. For the last year, I have rented it out. I am now going to sell the property and I want to know how much money I will be paying for taxes for my profit from the sale. I understand I will pay both Capital Gains and Depreciation Recapture Taxes. The online Depreciation Recapture calculators online ask how many years I've owned the property...will the Depreciation Recapture tax be based on the 15 years I've owned the condo or on the 1 year I rented it out?

Original Cost of Condo: $105,000

Selling: $338,000

[Mike9241]

depreciation recapture is only on the that allowed (what you took) or allowable (what you should have taken under the tax rules) but only for the period it was a rental (the 1 year or so) since your gain exceeds tax basis (sales price - sales costs - cost to purchase  - improvemrents+ depreciation ) you pay taxes of up to 25% on the depreciation. then the home sale exclusion comes in. You seem to qualify for the full $500,000. since this is more than the remaining part of the gain you would owe no tax  My answer could change if I knew about your housing situation during the 1 year it was a rental.

[LK83]

During the last year I moved in with my boyfriend (now husband). 

Would the condo qualify for the Home Sale Exclusion since it was used as an investment for the last year? 

[Carl]

You seem to qualify for the full $500,000

Mostly likely, not. The sale will qualify for a $250,000 exclusion.

During the last year I moved in with my boyfriend (now husband).

If "BOTH" of you lived in the house as your primary residence for at least 730 days (2 years) of the last 1826 days (5 years) you owned it, then you would qualify for the $500K exclusion on the gain. However, it appears that only one of you has lived in the house as your primary residence for the full 730 days at this specific and explicit point in time. Therefore, the sale would qualify for a $250K exclusion.  If on the closing date of the sale, both of you have lived in it as your primary residence for the requisite 730 days, then you'll get the full $500K exemption.

.will the Depreciation Recapture tax be based on the 15 years I've owned the condo or on the 1 year I rented it out?

The property is depreciated "ONLY" while it is classified as a rental and in service as such. So based on the information provided, you're only looking at one year of depreciation (give or take) to be recaptured and taxed. Recaptured depreciation is taxed anywhere from 0% to a maximum of 25%. It just depends on your AGI.

[Opus 17]

See IRS publication 523.

In general, you can exclude the first $250,000 of gain if you owned the home at least 2 years and lived in it as your main home for at least 2 of the 5 years prior to the sale.  The 2 years do not have to be consecutive, so it really means, did you live in the home as your main home for at least 730 days of the 5 years ending on the date you sell.

Because you moved out and then moved back in, the 1 year that the condo was rented is considered non-qualified use.  You also always have to pay recapture first, even if you qualify for the exclusion.  

Lastly, you did not mention improvements; if you made permanent improvements, like a new roof, furnace, or flooring, that adds to your purchase price to create your adjusted cost basis.   You can also increase your cost basis by certain closing costs at time of purchase and reduce your selling price by certain fees at time of sale.

Here is an example of how the calculation might work.

• I assume that you depreciated the property properly, using the purchase price, so you took or could have taken about $3,500 of depreciation, and you made no improvements.
• Your adjusted cost basis is 105000 minus 3500 depreciation = 101,500.
• Your selling price is 338000 minus 6% commission = 317720
• Capital gains 216,220.
• The first part of the capital gains that is due to depreciation ($3,500) is recaptured at regular income tax rates with a cap of 25% (so 10%, 12%, 22%, or 25%).
• The remaining $212,720 is used in the calculation of qualified use.  If you owned the home for 15 years and had one year of non-qualified use, then 6.66% (1/15th) of your gain is not qualified.  So $14,252 is taxed as a long term capital gain, at 0%, 15%, or 20%, depending on your other income. (Note that non-qualified use is actually figured to the month or the day). 
• The remaining $198,468 of capital gains is eligible to be covered by your exclusion under the 2 year/5 year rule, and since that amount is less than $250,000, the entire $198,468 of capital gain is excluded from your income and not taxed.

Turbotax will do these calculations for you. 

Assuming a single adult with income above $57,000, you will pay a total of $2907 capital gains and depreciation recapture tax, using the above numbers. 

[Opus 17]

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@LK83 wrote:

During the last year I moved in with my boyfriend (now husband). 

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During the last year I moved in with my boyfriend (now husband). 

Note that even though marriage imparts ownership and your husband is considered to have owned the home for as long as you have, marriage does not impart residency, so if he has not lived there 2 years as his main home, your maximum exclusion is $250,000 and not $500,000.