Depreciation Recapture on Sale of Home

[abayba]

I sold my home in 2023. I depreciated a portion of my home for a few years (2008-2011) because I was renting out a room (within the home - not a seperate building.  This was my primary, and only, residence during this period and the entire time that I owned the house.  Turbotax is telling me that this depreciation does not fall under the home sale gains exclusion, and  needs to be recaptured and will be a capitol gain. Is this correct?

[DoninGA]

Yes, that is correct.  The recaptured depreciation will be entered as capital gains on your tax return.

[abayba]

Even if it was only partly of the home was used for rental (and depreciated)? If so, why depreciate a home if you have to pay it back later?

[DoninGA · Accepted solution]

When the room was being used as a rental you received a depreciation expense on the Schedule E you reported for the rental income and expenses.  

When the home was sold, the tax code requires that all depreciation is recaptured and entered as income (capital gains) on the return in the year of the sale. 

This is no different then if you owed a home and used it as a rental property where you depreciated the property every year getting the benefit of the depreciation as an expense which was used to reduce the rental income you received.  The depreciation must be recaptured on the rental property when sold.

[abayba]

Thanks,

Still don't understand why someone would depreciate in the first place then (since they're going to have to pay it back)...but that's a topic for another day. I appreciate your help on the Primary Question (recapture of depreciation)!

[TaxWander]

To clarify the recapture of the depreciation is just on the part that was being rented and not the entire home right? So basically if one took the accumulated depreciation from Schedule E, that would be an approx number to use to calculate the depreciation recapture tax (i.e. 25% of that number if the room was rented for more than 1 year)?

[DoninGA]

@TaxWander The only part of the home was one room that was being depreciated, not the entire home.  The depreciation recapture is only for the room that was depreciated.

[TaxWander]

Thanks, helpful! Could you throw some light on the tax calculation approximation approach? Reason I"m asking, is the tax due via quarterly estimated tax (when the house is sold) or at the end of the year? Also assuming that one would need to factor in the depreciation during the year of sale (since the taxes for 2024 haven't been filed but assuming that I would still take the depreciation for that room for 2024 until the house was sold).