We acquired property in 1997. Lived in it for several years and rented it out in 2007. Tenants are still living there but will vacate in the summer (2021). We are thinking about moving back in for two years and then sell. However, after researching online, it looks like we will have to pay huge taxes on the rental years even if we live there for two years prior to selling. Can someone please explain how this will be calculated? The lingo online is confusing... the January 1, 2009 law, depreciation recapture, etc? Would it be better to just sell it now and pay the hefty capital gains tax if there won't be much difference in taxes since our property was rented out for so long. Thank you for any help. We are currently looking for a tax specialist to advise but just wanted to ask here for any personal experiences.
Moving back in you would have non qualifying use when it was a rental after 2008 so part of the gain is prorated....you also have depreciation recapture and you won't get out of that unless you sell for a loss. Here's a link for you.......https://www.merriman.com/wealth-preservation/planning-on-moving-back-into-your-rental-in-the-future-...
See and read https://scholarworks.sjsu.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&artic... as that webpage gives what I consider a clear explanation, along with the mathematical formula to figure what percentage of your gain gets taxed because of unqualified use.
Those links outline how it is calculated, but here is another way to phrase it:
Let's say you bought the home for $200,000, took depreciation of $100,000, and sold it for $500,000.
If you sell it in summer of 2021, you will have a gain of $400,000. Of that, $100,000 (from depreciation) will be tax at your regular tax rate, and $300,000 will be taxed at the long-term capital gains rate.
If you make it your Principal Residence for two years, this is how it would work: You would have about 12.5 years of "Nonqualified Use" (rental after January 1st, 2009) which means you have 13.5 'qualified' years out of a total ownership of about 26 years.
If you do that, you would still have the $100,000 from depreciation that will be taxable at your regular tax rate. But the other $300,000 will be prorated. You can "exclude" (not pay tax on) 13.5/26ths of the $300,000. So rather than having $300,000 of long-term capital gains, you would only have $145,000-ish of long-term capital gains.
Again, you would need to make it your "Principal Residence" for at least 2 years to do that.
Things are a bit more complicated than that, but that should give you an idea for what the difference would be.