If we converted a rental property to our personal residence for 2 out of the last 5 years, do we owe tax on the sale if it is under $500K for married filing jointly?

[sbsund]

T-Tax is asking how many days we lived in the property vs how many days it's been a rental. We bought it and lived in it for 9 years, rented it for 11 years, lived in it for 2.25 more years, then sold it as our "primary residence". T-tax says we owe a bunch of taxes on the sale, which i assume is a straight 25% of the depreciation even though we aren't in that high of a tax bracket.  Is this correct?  

[Coleen3 · Accepted solution]

Depreciation is taxed at 25%, regardless of your tax bracket. It must be recaptured at the sale, even if qualify for the exclusion.

[sbsund]

So the next logical question is: why would we take depreciation if we are in a lower tax bracket than 25%?  Seems to me we shouldn't take depreciation on these assets if it results in a greater tax burden when selling =(  

[Coleen3]

The IRS requires it. You have to recapture it whether you take it or not.