Do I have to recapture depreciation for 31 years if I bought in 1987 and sell in 2018?

I have lived in my house since 1987 and took all tax deductions every year.  In 2009 I started to rent out rooms and reported rental income but still lived in the house full time until now.

My house is in preforeclosure and I am preparing to sell before it gets auctioned off.  I am trying to calculate the optimal selling price to avoid paying too much taxes or to have enough money to pay the enormous taxes! 

The base is only $200,000.  The selling price at FMV will be about $1,800,000.  I owe the bank about $1,400,000, including property taxes and insurance, interest, fines, fees, escrow etc. since September 2009.  I have fought bitterly in court to get a loan modification, but to no avail. The bank has consistently delayed proceedings over and over again.  Now the court has ordered a referee to compute the entire debt which, of course, has accrued enormously over the years.  

Some of that debt  - property taxes, insurance, interest - will be deductible, I suppose.  It's probably about $100,000 of the total debt.

If I pay the bank the entire $1,400,000, I will gain about $400,000 after sale.  I believe that I am eligible for $250,000 capital gains exclusion.  But the recaptured depreciation will count as taxable income.  Also, if the bank reduces the debt at all in settlement, that reduction amount is also taxable income.

I am trying to develop the best possible strategy for me so that I come out with something after sale and after repaying the bank.  I need to calculate the best sale price, which may not necessarily be the highest one.


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If you only rented the room out starting in 2009, you would only have depreciation recapture on the amounts take since 2009.

This would then be recaptured if there is a gain on the sale.

The gain for tax purposes has nothing to do with the loan amount.

The gain to computed as follows:

Sales price less selling expenses (closing costs, sales commissions etc) = Net sales price. 

Cost of home when purchased plus major improvements over the last 31 years is your cost of the home.

Net Sales Price - Cost basis (purchae price plus improvments) = Gain.

Then the gain if single up to $250,000 can be excluded from income on a personal residence. 

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