Home sale

[raven77]

I sold my home in 2019.  It had been primary residence from 2004-2006, when PART of it was used for vacation rental until 2015, after which the whole house again was primary residence.   Do I need to let IRS know that this rental period was only for part of the home, rather than the whole home?  It appears  I need to notify them of the sale, even though my profit was less than 100K. Also, am I still required to pay a depreciation recapture of the entire amount of depreciation I took while part of the home was a rental?  Thanks a lot!

[Opus 17]

Unfortunately, you have a very complicated situation. I believe the TurboTax will handle it correctly. But current IRS instructions do a very poor job of explaining.  Because you have two periods of primary ownership with a period of rental in between, you have a period of non-qualified ownership, and that reduces your ability to exclude capital gains.  You also must definitely pay depreciation recapture on all the depreciation that you claimed or could have claimed while using the home as a rental.  I will post a longer answer later that explains the concept of non-qualified ownership. The short answer is, yes you must report the sale, yes you must pay recapture tax, and no, your gain is not all excludable.

[Opus 17]

Just to clarify, was the home always your primary residence? Even when part of the home was used as a rental, was the rest your primary residence?

[raven77]

Thanks.  The thing that has thrown me is that 80% of the home has always been used as a primary residence.  The business use was for 9 years of 20% use, ending in 2015.  Indicating all that in Turbo Tax has been confusing and that’s why I reached out to the community.

[Opus 17]

OK, Since this was always at least partly your primary residence, you don’t have to worry about the “unqualified period” rules.  But you do still need to pay recapture.  For example, if you bought the home for $100,000, and made $20,000 of improvements, and took $15,000 of depreciation, then your adjusted cost basis would be $105,000. If you sell the home for $300,000, your gain would be $195,000. The first $15,000 which represents depreciation, is taxed as recapture.  Since the remainder of the gain is less than the exclusion and you qualify for the exclusion, the gain is not taxable.  I believe that recapture is taxed at your ordinary marginal rate up to a maximum of 25%, although the rules changed in 2018.

I haven’t entered this in TurboTax but I can suggest some people who may be able to help you. @Carl  @DoninGA 

[Carl]

The business use was for 9 years of 20% use, ending in 2015.

So while you will report this in the section for "Sale of Home (Gain or Loass)" before you can even start you need to know exactly how much depreciation was taken. To get that amount, you'll need your 2015 tax return. In that return look for the IRS Form 4562 for whatever the depreciation was for. There will be two IRS Form 4562's for that property and they will both print in landscape format. One is titled "Depreciation and Amortization Report" and the other is titled "Alternative Minimum Tax Depreication Report". You will definitely need the first one, but "could" also need the 2nd one.

So until you get those forms and can know for a fact exactly how much depreciation was taken, there's no need to pursue this any further.

[raven77]

Yes, it has always been the primary residence.