Capital gains on a Rental

[Anonymous]

Hello! Hoping to get some information regarding selling a rental that was formally my primary residence. For context for the question here is some info:

• - Purchased the house in June 2015 for $199K (tax value home $126K and land $40K) and lived in it until 2019
• - Started renting it out in June 2019, worth approximately $300K (tax value home $152K and land $56K)
• - Have written off about $8500 in deprecation capture in the past 2 years
• - Current price of the home is now $340K (tax value home $190 and land $58K)

My understanding is that if I have lived in the home as my primary residence for at least 2 out of the 5 years and then sell, I would pay no capital gains except 25% of the recapture taxes I wrote off. If decided to rent it out for another 2 years and lose that exemption how are my capital gains calculated…..is it the difference from the new sale price of the home and the “original sale price” we purchased it for or from the time is was put “into service value” as a rental?

Ex. est 2023 value of $360K - 2015 value of $195k = $165k

Ex. est 2023 value of $360k - 2019 value of $300k = $60K

[Carl]

Your understanding is correct. A few things that you may or may not be aware of here however.

1) You will pay taxes on recaptured depreciation no matter what. Depreciation recapture is not excluded from taxation under any circumstances.

2) Depreciation is based on the *LOWER* of what you paid for the property originally, or it's FMV on the date it was placed in service.  The tax value has absolutely nothing to do with it. What matters is which is lower; a. what you paid for the property when originally purchased, or b. the fair market value of the property on the date it was placed in service.

You'll report the sale in the rentals section of the program. So provided the last occupant to move out of the property prior to the sale is a renter, you will NOT convert the property back to personal use. There's no need, and it just complicates the tax reporting if you do.

As to exactly how to report it in TurboTax, assuming you actually close on the sale in 2021, wait and deal with it next year when you do the 2021 tax return.