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Sam123
Returning Member

Primary residence to investment property in 2020 and sold in 2021

I lived in primary residence 9 months in 2020 and then tried to rent it in Oct-Dec 2020 with no  luck. Then tried in 2021 to rent with no luck but then decided to sell in summer 2021. What's the best way to handle this for taxes? Is it worth having it as an  investment property for Oct-Dec 2020 and then Jan-July 2021 and write off the mortgage/taxes/depreciation/etc. Then do depreciation recapture for 2020 and 2021. Or just keep it as primary residence. I lived there 10 yrs and was my primary so no cap gains to worry about? 

 

  • 30% tax bracket
  • Total costs to write off: $24,700 for Oct-Dec 2020 as a rental 
    • mortgage: $9k in Oct-Dec 2020
    • prop taxes: $3K Oct-Dec 2020
    • depreciation: $10k total for Oct-Dec 2020
    • HOA: $2400 Oct-Dec 2020
    • Utilities: $300 total
  • No other investment properties so no other rental income 
4 Replies
pk
Level 12
Level 12

Primary residence to investment property in 2020 and sold in 2021

@Sam123 , please pardon me for explaining something first and perhaps then  answer to your question would be self-evident:

1. Tax on rental/ income property  is reported on Schedule-E and if you look at that form you will see that your gross rental income ( even if zero ) is offset by allowable expenses and allowable depreciation.  Thus in your particular case , the net taxable income  from  this  would be negative.  This  negative income  is limited by Passive Activity Loss Limitation (PAL) rule --- generally up to $25,000 per year   ( depends on  your filing status, your other passive incomes/losses and your Modified AGI )  If you enter the details into TurboTax, it will compute this for you.  Un-allowed losses  ( i.e. beyond  the  PAL ) is suspended losses  that is used up in future years  or at the  time of sale of the property.

2.  The accumulated depreciation   is used to reduce your basis  ( acquisition cost plus cost of allowable improvements  ) and thus increase  your gain at the time of sale.  So while depreciation helps  during operational life, it hinders  by raising gain at disposal.

3. On sale , that portion of the  gain that is caused by  accumulated depreciation is taxed as ordinary income , the rest is  eligible for capital  rate taxation.  Thus if you had  500,000 gain and $20,000 was due to  accumulated depreciation, then  the first 20,000 would be taxed  at  your marginal rate ( depreciation recapture ) , the rest i.e. 480,000,  would be eligible for capital gain treatment at your capital gain rate.

4. In the example above, only the amount after depreciation recapture ( 480,000 ) would be eligible for exclusion from taxation if and only if you meet  the  2 + 2 rule  ---  for a joint filer  one of you must have owned  the property for  a least  2 years  and each  of you must have used this property as you main residence for at least 730 days  total with a look back of five years from the date of sale of the property .  Another rule  is that  you must not have taken this exclusion in the last two years.

 

So does this help ?

Sam123
Returning Member

Primary residence to investment property in 2020 and sold in 2021

So theoretically I could have a $25K loss on ordinary income and then have $20K depreciation that I would have to recapture in 2021 (max tax rate is 25% on recapture I believe).  The 25K income loss could result in tax gain of $7500 as that would be less income of $25k?

 

With 500k cap gain exclusion, what happens if depreciation is for part of year. Tried to rent Oct-Dec 2020 and then Jan-July 2021 so not full year of deprecation. So what happens then as not taking full $20k depreciation/yr x 2 years for $40k. It would be more like $10k in 2020 and 2021???

 

Not sure if this is correct?

Critter-3
Level 15

Primary residence to investment property in 2020 and sold in 2021

Since it was unsuccessfully rented I would skip any rental mention on the return so you can skip the ridiculous deduction/recaptured mess  and you will retain the ability to exclude the profit which will be the better option IMHO. 

pk
Level 12
Level 12

Primary residence to investment property in 2020 and sold in 2021

@Sam123  I quite agree .  The  "recapture" is from the perspective of the IRS -- i.e.  the  accumulated depreciation ( to the extent  of the gain ) is taxed at your MARGINAL rate  not at Capital gains rate  -- and so if your marginal rate is 30%, then  this amount is treated as ordinary gain and taxed at that rate  AND is not eligible for  exclusion  ( primary residence  disposal ).  So I think you should work out the  final figures  using TubroTax  and see which way it is better for you.

 

stay safe 

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