Sold a Pennsylvania rental property and need to calculate capital gains where depreciation was ever taken

[AWK9876]

Hi, I read a similar answer concerning federal taxes and I understand in that case depreciation must be taken.  However, the question about state taxes is more complicated because some states, as I understand, are "decoupled" from the federal taxes on capital gains.  I live in Maryland and in my case, we never made money on our PA rental and our son eventually lived there rent free before we sold it.  Because we never made any money in PA we never paid any income taxes there or took any depreciation there.  We DID however take depreciation on our federal taxes.  I called PA's tax help line twice and one guy told me PA tax is decoupled and we only need to use the original basis value (plus cost of capital improvements)  without depreciation and the other guy told us the opposite.  What do I do?

[Mike9241]

get the help of a tax professional familiar with PA and MD taxes because your situation is more complicted then what can be answered easily on this forum.  

[AmyC]

You have two issues. One, determining the correct basis for the rental house in PA. Two, determining capital gains. PA is decoupled from the federal for the capital gains portion, not the basis portion.

For the first concern, while you never had $33 in taxable income and never filed a PA return, the PA law states that the PA tax basis must be reduced by allowable depreciation, even if not taken. This means, you will reduce the basis of your PA house to match your federal basis. See Cornell Law.

Secondly, capital gains. PA does not use the same rules as federal, that is correct. It is taxed at a flat 3.07% regardless of how long you held the property.