Huge tax owed because of depreciation recapture

Forum|Forum|6 years ago
March 26, 2020
3 replies
32 views

I bought a condo in 2008 and sold in September of 2019. It had been my primary residence except for a 2.5-year period when I was overseas and had rented it out. While doing my 2019 taxes, Turbo tax shows 8K in Federal and 1.5 K in State taxes because of depreciation recapture.

Oct 2008: Purchased for 395K

Oct 2008 - Feb 2013: Primary Residence

March 2013 - Aug 2015: Rental (total depreciation claimed 37K)

Oct 2015 - Sep 2019: Primary Residence

Sep 2019: Sold for 600K with 18K paid in sales commission.

When I do the math by cost basis is 358 (395-37). Using 582 as the adjusted sale price, I am showing a profit of 224 which is below the 250/500 tax-free amount. Why am I getting hit with this tax when I am below the threshold and is there a way to avoid this?

For what its worth, the entire proceeds from the sale the condo were invested it into a single-family home right away which is used as our primary residence. Is there a way I can claim 1031 exhange?

Any and all ideas will be appreciated.

Best answer by Anonymous_

@TaxPayer123 wrote:
For what its worth, the entire proceeds from the sale the condo were invested it into a single-family home right away which is used as our primary residence. Is there a way I can claim 1031 exhange?

It is actually too late to claim a 1031 exchange for this transaction since you, apparently, did not use any kind of exchange facilitator or qualified intermediary.

In order to have a valid 1031 exchange, you cannot be in receipt of any funds (directly or constructively) prior receiving the replacement property. See Treas. Reg. §1.1031(k)-1(f)

Carl

Level 11

Depreciation recapture is not included in the "2 of last 5" capital gains tax exclusion rules. You will pay taxes on recaptured depreciation, no matter what.

Anonymous_Answer

Level 15

@TaxPayer123 wrote:
For what its worth, the entire proceeds from the sale the condo were invested it into a single-family home right away which is used as our primary residence. Is there a way I can claim 1031 exhange?

It is actually too late to claim a 1031 exchange for this transaction since you, apparently, did not use any kind of exchange facilitator or qualified intermediary.

In order to have a valid 1031 exchange, you cannot be in receipt of any funds (directly or constructively) prior receiving the replacement property. See Treas. Reg. §1.1031(k)-1(f)

AmeliesUncle

Level 15

@TaxPayer123 wrote:
I bought a condo in 2008 and sold in September of 2019. It had been my primary residence except for a 2.5-year period when I was overseas and had rented it out. While doing my 2019 taxes, Turbo tax shows 8K in Federal and 1.5 K in State taxes because of depreciation recapture.

Oct 2008: Purchased for 395K
Oct 2008 - Feb 2013: Primary Residence
March 2013 - Aug 2015: Rental (total depreciation claimed 37K)
Oct 2015 - Sep 2019: Primary Residence
Sep 2019: Sold for 600K with 18K paid in sales commission.

When I do the math by cost basis is 358 (395-37). Using 582 as the adjusted sale price, I am showing a profit of 224 which is below the 250/500 tax-free amount. Why am I getting hit with this tax when I am below the threshold and is there a way to avoid this?

As was pointed out, you can not use the $250,000/$500,000 exclusion on gain due to the $37,000 of depreciation. That is taxed at your regular tax bracket, up to 25%.

For the rest of your $187,000 gain, because you moved back into it after it was rented, that triggers the "Nonqualified Use" rules. Because it was only your Principal Residence for about 8.5 years out of a total of 11 years of ownership, you can only exclude 8.5/11ths of the $187,000, and you will pay tax on the other 2.5/11ths of the $187,000 (the actual calculation uses days, not full years).