I am selling my primary residence where I have rented rooms within the same, shared dwelling unit. How much in capital gains may I exclude for the home sale?

[maglib]

If you had rented rooms, you would have been depreciating a portion of the home over the life. You would have to see what portion you had allocated as rentals. You actually would have a larger gain as your cost basis gets reduced by the depreciation allowed for the rental portion (Note regardless if you took that depreciation, it was allowable and does reduce your basis).  You would have a gain on the sale related to the investment portion.  

[ben.walke]

Thank you for your prompt response!  I understand that I must consider depreciation in relation to my home sale price for the rented rooms.  However, in terms of capital gains, my primary residence and rented rooms are in the same dwelling.  Section 121 states:  "Under 1.121-1(e)(1) , no allocation of the gain from the sale or exchange of property is required if both the residential and non-residential portions of the property are within the same dwelling unit."

https://www.irs.gov/pub/irs-drop/rr-14-02.pdf

page 8, 4th paragraph

Since my rented rooms and primary residence are in the same dwelling, wouldn't "no allocation of the gain" apply?

Thank you,

[Critter]

Ok ... in the simplest terms ... the depreciation is recaptured first then any cap gains after that is eligible for the exclusion.  The depreciation portion of the profit is recaptured as ordinary income and taxed at your marginal rate. 

Purchase price + cost to buy + improvements =  the cost basis

Cost basis - depreciation taken or allowed = adjusted cost basis

Sales price  - (adjusted cost basis + cost of sale) = profit

Profit - depreciation =  gain allowed to be excluded

[ben.walke]

Your explanation and formula are very clear. My main question is, am I allowed to take the max gain exclusion (after deprivation, up to 250k, single) even though I rented rooms?  The rented rooms shared a dwelling with my primary residence.

[tagteam]

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@ben.walke wrote:

My main question is, am I allowed to take the max gain exclusion (after deprivation, up to 250k, single) even though I rented rooms? 

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You can take the maximum exclusion of $250,000 but you cannot exclude the amount of gain due to depreciation deductions taken (or allowable), which is called unrecaptured Section 1250 gain.

Example: You have a total of $250,000 in gain and took $10,000 in depreciation deductions = $10,000 is taxable gain.

[Carl]

Undertsand that under no circumstances can you exclude the recaptured depreciation as part of the "lived in 2 of last 5 years" exclusion. You *WILL* pay taxes on that recaptured deprecation *no* *matter* *what*. It will be taxed at a minimum of 15% and a maximum of 25%, depending on your AGI. Also keep in mind that "ALL" of your gain, including the recaptured depreciation, gets included in your AGI; thus guaranteeing that it will be higher and "may" push you into a higher tax bracket.

[tagteam]

Unrecaptured Section 1250 gain is taxed at a taxpayer's ordinary income tax bracket up to a maximum of 25%; there is no minimum amount of tax on such gain (it could be as low as zero).

[ben.walke]

On which tax form would I report my allowed depreciation associated with my sale?  Essentially, where on my taxes do I indicate the recapture of the depreciation?

[tagteam]

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@ben.walke wrote:

On which tax form would I report my allowed depreciation associated with my sale?  Essentially, where on my taxes do I indicate the recapture of the depreciation?

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I sincerely hope you are using TurboTax as opposed to attempting to prepare your return manually. If you are using TurboTax, then you would just start with Sale of Home (gain or loss) in the Less Common Income section; you will be asked to input the amount of any depreciation you deducted (or were allowed to deduct).

Otherwise, you need to calculate your Unrecaptured Section 1250 gain using the IRS worksheet.

See https://www.irs.gov/instructions/i1040sd#idm140625220010576

Subsequently, you will use the Schedule D Tax Worksheet or the Qualified Dividends and Capital Gain Tax Worksheet unless, of course, Line 15 or Line 16 of Schedule D is zero or less and you have no qualified dividends on Form 1040, Line 3a or Form 1040, Line 10 is zero or less.

See https://www.irs.gov/instructions/i1040sd#idm140625219882368