two family house

[rfentin]

Can I get a capital gains exclusion? I have owned a 2-family house for 25 years. I have lived in one unit w/ my wife and rented the other. I have depreciated the rental unit.I am considering converting the house into two condos and moving into the rental unit and selling my current residence unit. I plan to stay there for at least 2.5 years and then consider selling it and moving. 1) When I convert the house to condos, do I have to recapture the depreciation then or can I delay that until I sell the rental unit I moved into?2) If I sell the rental unit I have lived in for 2.5 years, will I get a full $500,000 reduction on my capital gains or will I get a reduction that coincides with the percentage of time I used it as my primary residence in relationship to my entire ownership period. For example – owned for 27.5 years, rented for 25, primary residence 2.5 years – capital gains reduction 2.5/27.5 = 9% of the usual $500,000 exclusion?

[Critter-3 · Accepted solution]

1) When I convert the house to condos, do I have to recapture the depreciation then or can I delay that until I sell the rental unit I moved into?   It is delayed.

2) If I sell the rental unit I have lived in for 2.5 years, will I get a full $500,000 reduction  The word is exclusion not reduction  and although you can use the exclusion again  after 2 years  the depreciation recapture will still need to happen ... it cannot be excluded.   https://www.irs.gov/publications/p523

Recapturing Depreciation

If you used all or part of your home for business or rental after May 6, 1997, you may need to pay back ("recapture") some or all of the depreciation you were entitled to take on your property. "Recapturing" depreciation means you must include it as ordinary income on your tax return. 

[rfentin]

Enormously helpful

Thank you