Do we have to pay home sale tax? We had home office and took depreciation. Calculated the adjusted basis. Final profit $300K. TT is not giving us the 500K exclusion.

[mgregory0604]

The adjusted basis was calculated by purchase price + improvements - depreciation from home office. Profit was Selling price - Adjusted basis which was $381K.  Turbo tax states no income tax on $325K but have to pay tax on $55K which is the amount of the depreciation over the years.  We are filling joint return and I thought we had a $500K exclusion. Can someone explain?  Thanks in advance.

[DavidD66 · Accepted solution]

TurboTax is calculating your gain correctly.  You get an exclusion of up to $500,000 for your personal residence.  When you started taking the home office deduction, including depreciation expense, you converted that portion of your house to business property, and the gain on that portion is not eligible for the exclusion. You have already taken a tax deduction for the amount of depreciation you have taken.  You don't get to then exclude gain on that amount as well.  Moreover, that amount will be subject to depreciation recapture tax, which is 25%, rather than capital gain tax rates.

[SamanthaCarter]

My turbo tax is calculating my amount at MUCH more than 25%.  Before entering the amount of $14700 it shows we are getting a refund of $6476. After entering $14700, it reduces our refund by $6110. That's much closer to 50%. I am unsure what we are doing wrong here. That is very high.

[RobertB4444]

It also calculates capital gain on the portion of the house that was used for business and wasn't depreciated.  So, if you used your home 20% for business, then then 20% of the sale price of the home doesn't qualify for the $500K exclusion.  In addition you have to deal with the depreciation recapture.  All of that can add up to a bigger bill than folks are expecting.

@SamanthaCarter 

[SamanthaCarter]

I can understand that.  About 20% of the home was used as a home office for 5 of the 15 years we owned it. Even after that, we still fall well under the $500k. The only capital gains it is showing is the $14700 that we paid. And the tax adjustment for that $14700 is $6110. So, nearly 50%.

[MarilynG1]

Your Home Sale Exclusion will exclude the gain on your home sale. 

However, you may be taxed on Recaptured Depreciation for your Home Office.

If you used the regular method, the next thing to do is look for Form 8829 (Expenses for Business Use of Your Home). The line numbers may have changed over the years, but you will be looking for Depreciation allowable. Once you get that number for each year, add it up, and that will be the amount of depreciation deductions you took for your home office. 

TurboTax asks for that amount when you report that part of the home you sold was used as a Home Office in the 'Home Sale' section. 

Click this link for detailed info on Home Office Depreciation. 

@SamanthaCarter 

[Carl]

Recaptured depreciation is taxed at the "ordinary" income tax rate. It is not a part of the capital gain. Therefore, none of the recaptured depreciation is excluded from taxation. Only capital gains is excluded up to the maximum amount for your filing status.

If a percenage of the property was used for business (home office for example) then that same percentage of the gain is not included in the capital gains tax exclusion. In some cases, only a "percentage of that percentage" may be eligible for exclusion. It just depends on the specific facts. For example, if you used it as a home office for 2 of the last five years, but converted it back to personal use 2 1/2 years before the sale, then only a percentage of the gain on the business portion "might" be excluded, depending on other factors.