I have not sold the house yet, need to know the tax implications of selling before or after the 2-of-5 primary residence exclusion.
I purchased the house in 2003 for $131,500 and converted to rental property in May 2017. $11,000 assumed total depreciation taken, with estimate for 2019/2020, if we sell before May 2020 to meet the requirement of living in the house 2 of the last 5 years. Expected sales price ~$280,000.
So:
131,500
-11,000 depreciation
+5,000 improvements
125,500 <-- is this the cost basis?
280,000
-125,500
148,500 <-- gain in value?
11,000 <-- depreciation recapture
So, how much of the 148,500 is taxed and how much of the 11,000 assuming I meet the primary residence requirement?
Then, let's say I sell 1 day after the 3-year mark and don't meet the requirement, how much now?
$280,000 - (131,500 + 5000) = $143,500 Long term capital gain. None of it will be taxable if you meet the 2 year rule.
The $11,000 depreciation recapture will be taxed at your marginal ordinary income tax rate (not LT capital gains rate), but not more than 25%.
If you miss the May 2020 target sale date, the $143,500 will be taxed as a long term capital gain and the $11,000 as ordinary income (technically, section 1250 gain).