Turning primary home into rental property

[jbonifacejr]

My situation is somewhat cumbersome.

I have been renting out my home (KI) for four years. We originally intended to keep it as a rental. Now, life has changed. We are moving back into this home after four years and are renting out the home we just bought three years ago (MV). We intend to sell the MV home in the next two to three years. I want to know if I should take depreciation on the MV rental while we wait to sell it. 

[pk]

@jbonifacejr ,  :

(a) whether you take the depreciation  ( recognize it on your yearly return ) or not,  when you sell the property   you have to recognize the accumulated depreciation ( i.e. what should have been recognized each year ).

(b) whereas depreciation  up to a safe harbor  amount of $25,000 reduces your taxable income ( when some other condition s are met ),  it also reduces your basis in the property -- thus increasing your taxable gain.

(c) To be bale to exclude  up to $500,000  of  gain from disposing of   a residence you need to meet :

       1.  either of the filers must have owned the asset for at least   TWO years ;

        2.  Both must have used the property as  main  residence  for a total of 730 full days 

  these  are to be met with a look back of FIVE years  from the date of sale

         3. You  must not have excluded  such gain  within the last two years.

I re-iterate these  because , if you intend to  move and sell your current home and would  to  exclude the gain from taxation, you need  to meet these requirements.

Is there more I can do for you ?

[jbonifacejr]

Thank you for the information.

We lived in the home as our primary residence for almost 3 full years and owned it since it was built. I am sure we meet the three criteria you list.

We paid 1,010,000.00 for the house. We owe around $980,000. 

I am wondering if a reduction in basis means that if I take $25,000 in depreciation, that my basis drops to $985,000 and then another year of $25,000 would drop it to $960,000. Is that how it works? If so, I am not worried because even if we take $50,000 in depreciation over the next two years and sell it right at the end of that second year, we will likely only gain around $300,000 to $400,000.

I really appreciate the help. We tried to sell it before we moved back to our first home that was a rental for four years, but the market was just not strong enough.

[Mike9241]

here an example. the mortgage amount is irrelevant for determining taxable gain

assume you qualify for the full home ale exclusion

the depreciation you are required to take is the $1010K less the value of the land when purchased. the net is depreciated over 27.5 years but if you want you can use ADS depreciation that uses a 30 year live.

for this example assume the land had a value of $210,000 when bought., thus the buildings has a tax basis of $800,000 over 2 years using the 27.5 year life, depreciation would be about $58,000

selling price net of capital selling expenses assume $1,400,000. your gain is $1,400,000 - (1,010,000-58000) or $448,000. you are taxed on the $58,000 in depreciation. The remaining $390,000 qualifies for the home sale exclusion.

[AmeliesUncle]

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@jbonifacejr wrote:

even if we take $50,000 in depreciation over the next two years and sell it right at the end of that second year, we will likely only gain around $300,000 to $400,000.

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The $500,000 exclusion does not cover depreciation.  Depreciate the property.

As a side note, if/when you ever sell the other home, it will be partly taxable even if you lived in it for two of the last five years.  Because it was rented and then you made it your Principal Residence afterwards, the gain and exclusion gets prorated.