Huge amount of federal tax due after sale of rental property

[nywang]

I purchased my home in June 2008 at $415K. After living there for 3 years as primary residence, we had to move to a different state due to job relocation. So I rent out my house for the next 12 years. I sold it for $560K in 2024. Now in Turbotax, after I have entered information as "Sale of Business Property", I see an income of $272K and federal tax due went up by $60K. How is that possible? First, do I have to pay for the capital gain if I used it as primary residence? Second, how could my income be $272K - isn't it $560K minus $415K equal to $145K? Thanks.

[Vanessa A · Accepted solution]

In order to have the sale excluded, you would have had to live in the house for 2 out of the last 5 years.  Since you rented it out the last 12 years, it does not qualify for the home sale exclusion.

Also, since you used it as a rental for the last 12 years, the house would have been depreciated during that time, now that it is sold, you have to recapture the depreciation. Basically, that means that the depreciation deduction you received over the 12 years is added back to your income (or in a way, drastically lowered your $415k purchase price). 

 

[nywang]

Thanks for your help!

With the sale of my rental property, now I am not only liable for big amount of tax, I also lost the child dependent care tax credit. Is this normal?

[DianeW777]

It depends whether you are referring to the child and dependent credit or the child tax credit. Both are here for your review.

• What is the child and dependent care credit?  -  Is not lost but the amount is limited and the percentage can lower to a minimum of 20% of the allowed expense based on income
• What is the child tax credit? - lost gradually if the AGI is more than $400,000 

You have access to all forms when you choose to print your return in TurboTax Online/Mobile.  However you are required to pay before printing, but do not have to file until you are ready.

• Can I print a copy of my return in TurboTax Online before filing?

If you are using TurboTax Desktop you can switch to Forms and review all forms and worksheets.

@nywang 

[nywang]

Thanks so much for you assistance. Now I am working on the NJ 1040 NR, as I am not a NJ resident. I see that NJ withheld 2% of the sales price as income tax. Is my income $272K (which includes both the price appreciation and the recapture of the depreciation) all taxable for state of NJ? Is the total amount of $272K my NJ income for the whole 12 year of Nonresident Period?  If that is the case, 2% withholding is not enough and I am even liable for more taxes. Thanks.

[DaveF1006]

In New Jersey, nonresidents are taxed only on income derived from New Jersey sources, such as the sale of property located in the state. The $272K you mentioned, which includes both price appreciation and depreciation recapture, would generally be considered taxable income for New Jersey if it represents the gain from the sale of property in the state.

The 2% withholding is an estimated tax payment on the gross sales price, not the actual taxable gain. This withholding is meant to ensure some tax is collected at the time of sale, but it may not fully cover your tax liability if your actual taxable gain is significant. You would need to calculate your exact tax liability based on the gain and file the NJ-1040NR to determine if you owe additional taxes or are eligible for a refund.

The income from the property sale is not spread over the 12 years of your nonresident period; it is treated as income for the year in which the sale occurred. If you believe the withholding is insufficient, you may owe more taxes when you file your return.