Rental property converted to Primary and back to rental then sold

[Sam123]

PLEASE HELP AS REALLY CONFUSED!!

I am trying to figure out how taxes work for this type of property inc capital gains, depreciation, depreciation recapture, loss carryovers, principal residence exclusion, etc. Any specifics will be greatly appreciated including any help on the math/numbers:

• Rental property Aug 2011-Aug 2020 for $300,000.
• Moved in and made personal residence from Sept 2020-July 2023
• Rental property again Aug 2023-March 2024
• Sold March 2024 for $425,000
• Gain of $100,000 minus closing costs/expenses
• Depreciation of approx $30,000 over the years as a rental
• Passive losses- Where do I find this? I read it is on Form 8582 last year, Page 2 Worksheet 5. I don't believe I have this form in last years returns. Does turbo tax automatically bring this over from past years? How does it know its for this property or is a cumulative passive loss regardless of the investment property as sold one a few years ago?

Questions:

1. Do I pay capital gains on the $100,000 or do I get "Principal Residence Exclusion: You lived in the home as your primary residence from 2020 to 2023 (three years)?"

---I thought I read somewhere that you can't bypass the capital gains by living back in the property and it gets prorated on months its a rental vs when it a personal property?? 

2. I believe I have to pay the Depreciation recapture on the $30,000? What's the tax rate on it- 25% and does it get added to income (the $30K or the 25% of the $30K)

• Depreciation Recapture: Depreciation claimed during rental periods is subject to recapture tax at up to 25%.

3. Do I pay the:

• Net Investment Income Tax (NIIT): A 3.8% NIIT may apply to the gain depending on your income.

How does TurboTax online fill out the info and what areas do I denote the rental and primary switches and associated dates. I don't believe I saw this clarification?

Any help is greatly appreciated

[Mike9241]

you had nonqualifying use during the first time it was rented 8/2011-8/2020 (the second rental period is ignored since it's after you used it as your personal residence) IRC 121(b)(5)

your ownership was 8/2011 - 3/2024

so your nonexludable gain is period of nonqualifying use divided period of ownership times your exclusion amount or gain whichever is smaller

your actual gain is 

sales price - selling expenses - cost of property reduced by depreciation allowed or allowable

so it would seem your actual gain is more than the $100K (when depreciation taken is considered). however, depreciation does not seem correct. you rented it for about 9.5 years. the depreciable life is 27.5 years (NON-foreign property) 30K/9.5 is about $3.2K per year which means depreciable basis would be about $80K+ making land about $220K-. if I'm correct run to a tax pro because the IRS requires you to compute gain using the larger of allowed (your $30k apparently) or allowable amount and it seems the allowable amount is larger than what you took. 

excludable gain would be the total gain less the nonexcludable gain

selling the property should release all the suspended losses. However, since there was rental use followed by personal use followed by rental use, I don't know if the sale can be properly handled through schedule E - rental worksheet

[AmeliesUncle]

You may consider a tax professional this year.

You had a profit of $125,000; it sounds like you are saying you had roughly $25,000 of purchase/selling expenses for a profit of $100,000.

Rough numbers:  You owned the home 12.5 years.  As Mike said, the 9 years of the first rental period is "Nonqualified Use", so that means you can't exclude 9/12.5ths (72%) of $100,000.  The other 3.5/12.5ths (28%) can be excluded.  In other words, you'll have roughly $72,000 of taxable profit, taxed at the long-term capital gain rate (usually 15%, plus state).

I agree with Mike that you may want to double check that $30,000 is the correct depreciation.  It certainly is possible in some areas, but overall that seems unusual.  That amount is taxed at your ordinary tax bracket, up to 25%.  The sale of your house will show $130,000 of gain ($100,000 of profit, plus $30,000 of gain due to the depreciation).

Did you have passive loss carryovers, or did you have profit or were the losses able to be used?  Look at your 2020 return to see if you had unallowed passive losses that year.  You MIGHT have had some carryover losses that you forgot to enter when you re-started the rental in 2023.  Or you might not have had carryover losses (you may have had profit or the losses may have been able to be used).

TurboTax automatically applies NIIT.  Both your personal residence and the rental would be subject to NIIT, so there is no need to adjust things for dates, etc.  But if your income is high enough to be subject to NIIT, I really, really suggest a tax professional this year.