How do I determine if I have a taxable gain on the sale of my rental property which was formerly my primary residence?

[elginbooth]

I purchased a condo on 9/29/09 for $156,900 and used it as my primary residence until I moved out and converted it to rental property on 7/25/14. I used a FMV of $156,900 on the date it was converted to rental property and rented it out at fair market value until I sold it on 5/23/16. I took depreciation of $2,616 in 2014, $5,705 in 2015, and $2,140 in 2016. I sold this property for $152,000 on 5/23/16. I met the test of having used the property as my primary residence for at least 2 of the past 5 years. Do I have a taxable gain on the sale of my condo and how much?

[TaxGuyBill · Accepted solution]

I first want to check that the FMV in 2014 was the same as your purchase price?  Or did you type the wrong number?

Your gain is (1) the Selling Price (after selling expenses) minus your (2) Adjusted Basis.

Your Adjusted Basis is usually (1) purchase price, plus (2) cost of improvements, minus (3) depreciation.

So using the number you gave, you have a $5561 taxable gain.

The fact it was your primary residence for 2 out of 5 years does not change the tax on the depreciation.  In other words, that would only come into play if it was sold for more than your Cost Basis ($156,900).

[elginbooth]

TaxGuyBIll, thank you for your answer. Yes, I believe that the FMV in 2014 was roughly the same as my purchase price. Of that $5,561 gain, is it taxed at ordinary rates or capital gain rates?

[TaxGuyBill]

It is taxed at your ordinary tax rate, up to 25%.  That 'extra' income COULD also affect some other calculations, but only $5561 of 'extra' income shouldn't affect too much, if anything.  Don't forget State taxes too.

[elginbooth]

Thanks Bill, I live in NH so no state income taxes.