Since 2010 I have been renting extra rooms in my house to tenants while I still also live in the house. I have been reporting rental income each year on my 1040 Schedule E and also deducting expenses for the portion of my house (40%) devoted to the rental. As part of my returns, I have been claiming depreciation expense on 40% of the house value.
This year (2016), I ended the rentals on June 30th after six and a half years and also moved out of the house, which is now vacant and up for sale. For my 2016 federal tax return, I will show six months of rental income and six months of rental expense, including depreciation for half a year on the 40% of the house that is rental. My question is how do I account for the depreciation I have been claiming on the rental portion of the house for the last six and a half years when the house eventually sells? When I report the sale of the house on my tax return, my profit will probably be under $100,000 or well below the $250,000 exclusion amount. But how do I factor in the depreciation I have been claiming each year on the 40% rental portion of the house, which by mid-2016 will total approximately $22,000? Do I have to pay tax on that total depreciation amount or will it be considered part of the overall gain on the house which will still be well below the 250,000 exclusion? And will the tax treatment be any different if the house sells in 2016 (a year in which I was still doing a rental for six months) or if it sells in 2017 when there will be no rental stuff.
