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]

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).