Rental Property Sold options

[JackStraw42]

Hello.  I've owned a house since 2002 that I sold in 2020.  I lived in the home for the first 5 years, and when I met my wife, I moved in with her and started renting out my house.  I'm worried about getting hit with a huge tax bill because it seems that the property is going to be treated as a business or investment.  I've also read that there will be a "recapture fee" on the depreciation.  Is there anything I can do to avoid a huge hit at tax time?  Below is some personal information in case it's relevant.

• We file jointly with a combined gross income of around $110,000.
• I purchased the house in question for $85k in 2002 and sold it for $117k in 2020.  We still owed around $50k at the time of the sale.  
• We didn't use it for personal use at all since 2007, but the rent we charged ranged from not quite covering the mortgage to $20-$30 over the mortgage payment amount.
• We don't own any other properties other than the one we live in, and have no other capital gains or losses.

Thank you for any advice you can offer!

[Mike9241]

you should have asked your questions before you sold. now it is too late.   you did not occupy the house for any 2 years in the 5 years before the date of sale.  that disqualifies you using the homeowner's sale exclusion.  your gain is fully taxable including the depreciation recapture. 

the mortgage in no way affects the taxable gain. 

you enter the sale through the rental income worksheets. 

any losses not allowed due to the passive loss limitation will now be allowed. 

[Critter-3]

At your income level the losses on the Sch E were deducted each tax year so you already got that benefit.  Now you will have to recapture the depreciation  as ordinary income since you deducted it as such.  If you did NOT take any depreciation then RUN to a local tax pro to get this fixed by using the form 3115.   There is no way to avoid the tax bill on this sale.  

[JackStraw42]

Thank you so much for the responses guys!