rental sale

[ffchou2020]

i lived in my former rental for 4 years. if I sell as my primary resident, what taxes am I liable for

[NCperson]

need more detail 

what month / year did you move into it?

what month / year did you purchase it?

what month / year did you move out? 

you must RESIDE IN and OWN the home for 2 of the past 5 years prior to the date of the sale to be elgiible for the capital gains exclusion. 

[ffchou2020]

yes--I rented for about 5 years and took it back and have lived in it for 4 years now---I understand about the capital gain exclusion amount--but have heard about having to pay back the depreciation amount used during the rental?-depreciation recovery as part of reporting income?

[NCperson]

that is correct - the depreciation is subject to recapture tax.. 

[ffchou2020]

thanks..where in the irs code is that reference?  how do I report it using turbo tax?

[NCperson]

@ffchou2020 - just follow the prompts in Turbo Tax 

https://www.irs.gov/pub/irs-pdf/p544.pdf

page 27 

[Opus 17]

First, your rental time is non-qualified for the personal exclusion.   This isn't explained in publication 523 (the IRS stopped trying to explain in in 2013 or so, but the calculation is included in worksheet 2 in publication 523.)  The exclusion is not intended for landlords to convert taxable rental property into non-taxable gains on personal property, so the rental time is not eligible for the personal exclusion.  If you owned the property 9 years but rented it for 5 years, then 5/9th the gain is non-qualified.  (You will figure it to the month or the day.) 

Second, you must recapture any depreciation you claimed or could have claimed.

Third, remember that you can include certain closing costs in your adjusted basis, and you can reduce the selling price by certain items.  These are listed in publication 523.

Example:

• Purchase price in 2014 was $200,000.
• Depreciation you took or could have taken for 5 years of rental is about $32,000.
• Adjusted cost basis is $168,000.
• Selling price is $400,000
• Capital gains is $232,000.
• The first $32,000 is taxed as ordinary income (with a cap at 24% I believe).
• Out of the next $200,000 of gain, 5/9th or $111,111 is non-qualified, and is taxed as long term capital gains at 15% for most people.
• The remaining 4/9th of the gain, or $88,888 is qualified for the exclusion.  Since you meet the rules for the exclusion, you can exclude up to $250,000 of the gain. Since this is more than the qualified gain, the qualified gain is not taxable. 

[ffchou2020]

thank you for the great example...just to clarify--1) NOT all the capital gain within the 250K exclusion is tax free and 2) the portion that qualifies is the ratio of time spent as the owner over the total time of ownership--in this case 4 out of 9 years.

[Opus 17]

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@ffchou2020 wrote:

thank you for the great example...just to clarify--1) NOT all the capital gain within the 250K exclusion is tax free and 2) the portion that qualifies is the ratio of time spent as the owner over the total time of ownership--in this case 4 out of 9 years.

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I'm not sure you have the concept.

 Qualified ownership is the time you owned the home and lived in it as your main home, expressed as a percentage of the total time you owned the home.  When you move back into a rental as your personal home, the time it was used as a rental is non-qualified for the exclusion.  In your case it appears that 5/9th (55%) of the time you owned the home is non-qualified, and 4/9 (45%) is qualified, although Turbotax will calculate the percentage based on the exact dates you bought the home, moved in as your main home and the selling date.   (And the longer you own the home and live there as your main home, the higher the percentage will get, although it will never get to 100%.)

You first pay income tax on the part of the gain due to depreciation (recapture).  That is never covered by the exclusion.

Then in your case, 55% of the remaining gain is non-qualified and fully taxable.

The last portion of the gain (45% after depreciation) is eligible for the exclusion.  If that eligible portion is less than $250,000 (or $500,000 if married filing jointly), then that portion of the gain will be covered by the exclusion.  If that remaining 45% of the gain is more than your exclusion, you will apply the exclusion ($250,000 or $500,000) and then whatever is left over will also be taxable capital gains.  

[ffchou2020]

thank you for your explanination.