rental sale

Forum|Forum|2 years ago
September 25, 2023
2 replies
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i lived in my former rental for 4 years. if I sell as my primary resident, what taxes am I liable for

Not A Product Question

NCperson

Level 15

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.

ffchou2020Author

Level 2

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?

Opus 17

Level 15

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.

ffchou2020Author

Level 2

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.