Selling property that was my primary residence for 2 years, but I rented out part of the house during that time

[dima_churin]

Hello,

I have a property that I plan to sell in summer 2018. In summer 2015 I converted this property from primary residence to rental property. From summer 2012 to summer 2015 I had this property as primary residence. Although, during that time I rented out portion of my house.

Will I have to pay income taxes after I sell the house? As I mentioned I had this property as primary residence for 2 years, but it was partially rented out during that time.

Thank you,
Dmitriy

[TaxGuyBill]

Was it all one shared home while you rented out part of it, or did the renter have a separate 'apartment' with a separate kitchen and entrance?

Will the house be sold with 3 years of you moving out?  The timing is critical.  You must have used the home for at least 2 years out of the 5 year period before the sale date, so if you were moved out for any more than 3 years (count the days), it could make a BIG difference.

Roughly how much profit (sales price minus costs of purchase and improvements) will you have from the sale?

Did you claim depreciation for renting it out (you should have)?

[dima_churin]

Hi, Thank you for getting back to me so quickly. The house was rented out as ~40%  while it was my primary residence (no separate kitchen or entrance). I have not yet depreciated the house while I was renting it out (after I converted it to full rental). As I understood, please correct me here if I wrong, any depreciated amount will count toward my income when I sell the property in any case (even if i sell the house for lesser amount than I bought it, the depreciated amount will be my income). I first wanted to depreciate the house while renting it, but since it does not matter at the end I decided no to do it. Let me know what are your thought on it.

As for the timing, yes I want to sell it couple month before it's 3 years mark.

As for the profits, I expect to have ~40k after all the realtor fees are paid.

[dima_churin]

That is a very tricky. I did not know about such details. Thank you for your response on this issue.

[TaxGuyBill]

You are welcome.  I'm glad I could help.

[TaxGuyBill · Accepted solution]

No, if you continue to not claim depreciation (see below), you will not pay any Federal taxes when you sell the house if it is sold within 3 years of you moving out of it.

However, claiming depreciation is not an option, it is a requirement of the law.

In your case, this probably won't affect you, but I'll say it for anybody else that may read this:  Depreciation lowers your "basis" (cost) whether you claim it or not.  So let's say the cost of the home and improvements were $200,000, and you COULD have claimed $15,000 of deprecation.  Your "basis" (cost) is now $185,000, even if you did not claim the depreciation.  So if you sold the house for $240,000 (after selling expenses), you now have a $55,000 gain.

The $250,000/$500,000 exclusion for using the home as your Principal Residence for 2 out of the last 5 years does NOT eliminate depreciation, so in most cases you would pay tax on it when the house is sold.  However, in your case, because you did not actually claim the depreciation, that exclusion CAN cover it.

If the home was sold for less than $185,000 (in the example), no, you would not pay any tax on the depreciation.  In other words, you would have wasted $15,000 of deductions by not claiming the depreciation.

[newfound]

I need more of an explanation here.  So the depreciation was $15000 but the gain was $55,000 would you have to pay taxes on all $55,000 or just on the $15,000 depreciated and the $40,000 is tax free because it was a primary residence?

[TaxGuyBill]

@newfound   Can you give details of your situation?  Did you use the home as your Main Home for at least 2 years out of the last 5 years?  If so, was it used as your Main Home AFTER any rental period?

[newfound]

I don't have any details.  I am referencing the above scenario!

[TaxGuyBill]

If you meet the 2 year rule and you do NOT live in it after it was rented, you would pay taxed on $15,000.

[RA2022]

I realize this post was a while ago but I've found myself in a situation and now realize I don't know how to treat the depreciation. 

I bought a condo in November 2012 (for about $250k) and lived there until I rented it in February 2024 (because I could not sell it at the time). From what I'm reading, when I file taxes for 2024, I should claim depreciation using MACRS, as this is required by the IRS. However, I don't understand how much depreciation I should be taking, given that the property was already 12 years old at the time of renting.

Secondly, I plan to sell the property in the summer 2025 what will the depreciation recapture be?  (the current market price on te high end is $300k)