Do I have to pay capital gains tax on the sale of a rent house on both my federal taxes and my state income taxes?

[reid06]

I lived in Georgia when the house sold, but I moved back to Texas  few months later.  Also, I rented the house for 3 years and 4 months, though I lived in it before that (but only for 1 year and 8 months).

[JohnH2]

The rental property was never a personal residence because you did not live in it for two of the five years preceding the date of sale. The rental property would not be a capital asset so the gain would not be capital gain.  There would be no exclusion of gain, either. 

If you have a gain it would be ordinary, including depreciation recapture, and would be taxable for Federal.  With respect to your state tax, the gain on the disposal of real estate is generally taxable by the state where the real estate is located, not your resident state.  The state gain calculation may be different from the Federal calculation.

[Update]

Your resident state will tax all of your income, including out-of-state gain.  Usually the resident state grants a tax credit for taxes paid to the non-resident state; but since Texas has no income tax, this will not be the case.

[reid06]

TurboTax is calculating that I have to pay  Georgia taxes on the "other income", which is the gain on the sale of the house.  The "gain" is the depreciation recapture. Your answer is very helpful, but I'm still not sure if there is a way to get this off my Georgia taxes.

[kennethdale]

TurboTaxJohn2 is wrong.  Of course rental property is a capital asset.  If held for more than one year the gain is a capital gain.

[Asodhi]

I had the same feeling when I read that reply.  But how come a wrong answer is marked as the Best Answer!! (unless some other expert validates that)

[ColeenD3 · Accepted solution]

 It is not a capital asset, such as your personal home would be. You converted it to business property.

IRS Topic 409:

Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments.

If you sold the property for more than what you paid for it, there will be a capital gain tax treatment on that portion. The depreciation recapture is ordinary income.

You have gains that have to be reported on the Federal and Georgia returns.

[Edited 3/17/2021|10:58 AM EST]