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jamesallenjenkin
New Member

Do I pay Section 1250 recapture on a home I've lived in for more than 5 years?

We purchased a duplex in 1986 and moved into one of the units in 2008.  If we sell our unit (or the entire building) do we owe recapture on the depreciation taken on this unit while in service?  I remember a rule about 5 years, but can't find mention of it, so maybe I'm wrong or it is not applicable anymore.  Thanks.
1 Best answer

Accepted Solutions
TaxGuyBill
Level 9

Do I pay Section 1250 recapture on a home I've lived in for more than 5 years?

The depreciation will lower the "basis", so your gain (profit) will be increased due to the depreciation.

If you used the home as your principal residence for at least 2 of the last 5 years and did not exclude the gain on another home in the last 2 years, you can "exclude" (not pay tax on) up to $250,000 ($500,000 if filing as Married Filing Jointly) of the gain.

However, the $250,000/$500,000 exclusion does NOT eliminate Section 1250 gain from depreciation AFTER May 6, 1997.  In other words, if your total excludible gain is under $250,000/$500,00, you will pay tax ('recapture') on the depreciation from May 7th, 1997 through 2008.  You would not pay tax on the depreciation from 1986 to May 6th, 1997.

That applies ONLY to your unit.  If you sell the entire building, you can not use the $250,000/$500,000 on the other units.  That only applies to your unit that was used as your "principal residence" for at least 2 of the last 5 years.  All of the depreciation ("Unrecaptured Section 1250 Gain") from the other units will be taxed, usually at 25%. 

The taxable gain from the sale may affect other things on your tax return.  For example, the higher income may reduce or eliminate some deductions and credits, and you may be subject to the 3.8% Net Investment Income Tax.

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4 Replies
Bees
Level 7

Do I pay Section 1250 recapture on a home I've lived in for more than 5 years?

Did you only take depreciation on the portion of the property that was a  rental? Did you move from one unit to the other.? YOU don't claim it all as rental property. Depreciation taken when a rental is taxed .
Disclaimer: Not a tax professional. Information gathered from internet links. Anything dated in June 2019 was posted in prior years and is before the 2019 limits and changes.
Critter
Level 15

Do I pay Section 1250 recapture on a home I've lived in for more than 5 years?

Depreciation taken is always recaptured no matter how long you live in the converted unit.
pk
Level 13
Level 13

Do I pay Section 1250 recapture on a home I've lived in for more than 5 years?

adding to CRitter#2's reply above, the recapture is only from the profit i.e. that portion of the capital gain that is due to accumulated depreciation, is treated as ordinary income  and then the rest of gain is taxed under capital gain regime applicable to the taxpayer. Also the five year rule that still exists is the look-back period from the date of sale for qualifying the "prime residence" status of the home sale.
TaxGuyBill
Level 9

Do I pay Section 1250 recapture on a home I've lived in for more than 5 years?

The depreciation will lower the "basis", so your gain (profit) will be increased due to the depreciation.

If you used the home as your principal residence for at least 2 of the last 5 years and did not exclude the gain on another home in the last 2 years, you can "exclude" (not pay tax on) up to $250,000 ($500,000 if filing as Married Filing Jointly) of the gain.

However, the $250,000/$500,000 exclusion does NOT eliminate Section 1250 gain from depreciation AFTER May 6, 1997.  In other words, if your total excludible gain is under $250,000/$500,00, you will pay tax ('recapture') on the depreciation from May 7th, 1997 through 2008.  You would not pay tax on the depreciation from 1986 to May 6th, 1997.

That applies ONLY to your unit.  If you sell the entire building, you can not use the $250,000/$500,000 on the other units.  That only applies to your unit that was used as your "principal residence" for at least 2 of the last 5 years.  All of the depreciation ("Unrecaptured Section 1250 Gain") from the other units will be taxed, usually at 25%. 

The taxable gain from the sale may affect other things on your tax return.  For example, the higher income may reduce or eliminate some deductions and credits, and you may be subject to the 3.8% Net Investment Income Tax.

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