Where to claim depreciation recapture

[Alternatepriorities]

Last year I sold a house that had been my primary home for 2 of the past 5 years. The capital gains were small enough to be excluded on a primary home. I did however rent out the house for the 2 years and 9 months before the sale. I claimed depreciation during that time period, but i can't figure out where to claim the recaptured depreciation as income in 2021 without having a capital gain from selling a business. I've been using the IRS forms directly as that usually helps me understand the system better than a program like turbo tax walk me through it. Normally I do my taxes myself and then have my accountant do them separately so I can compare. Unfortunately he's had some health issues this spring and might not be available so it's more important than usual that I get things right.

Thanks!

[terran]

Unless I'm mistaken you don't recapture depreciation as such, it just reduces the basis of the home, so your capital gain on the sale is larger. Given that you lived in the home as your primary residence for at least 2 of the last 5 years the $250k/$500k single/married exclusion might mean you don't have a taxable capital gain despite the decreased basis. Hopefully someone can give a definitive answer on whether or not I'm correct as I'd also be interested in the answer.

[Alternatepriorities]

Thank you Terran! That would be fantastic if it does get calculated that way. We’d still be well under the exclusion even with the depreciation.

[MDM]

Unfortunately it isn't that favorable.  See Publication 523 (2021), Selling Your Home | Internal Revenue Service as the jumping-off point for more detailed investigation.  You'll wend your way through Form 4797 and the Schedule D Tax Worksheet at a minimum....

Might be well worth the cost of some tax software so you get a worked example of the various forms.  They can be much easier to decipher that way.

[HawkeyeNFO]

Proper version of TurboTax will take care of the math for you.  Regardless of the (lack of) capital gains, you're gonna owe the recapture.  Typically it's 25% of the depreciation you have taken over the period in which the property was rented.  Even if you didn't take the depreciation, you still owe the recapture, which is why landlords should ALWAYS take their depreciation as allowed.

[HawkeyeNFO]

Unless I'm mistaken you don't recapture depreciation as such, it just reduces the basis of the home, so your capital gain on the sale is larger. Given that you lived in the home as your primary residence for at least 2 of the last 5 years the $250k/$500k single/married exclusion might mean you don't have a taxable capital gain despite the decreased basis. Hopefully someone can give a definitive answer on whether or not I'm correct as I'd also be interested in the answer.

No!  This is wrong.  Depreciation recapture is independent of capital gains.

[Alternatepriorities]

Unfortunately it isn't that favorable.  See Publication 523 (2021), Selling Your Home | Internal Revenue Service as the jumping-off point for more detailed investigation.  You'll wend your way through Form 4797 and the Schedule D Tax Worksheet at a minimum....

Might be well worth the cost of some tax software so you get a worked example of the various forms.  They can be much easier to decipher that way.

Thank you. I worked through the math (mentally) on those work sheets and I think I see how it gets calculated if I can connect that with the right spot on the forms I should be set. I probably won't get to it until next week after I go do a section of the PCT with my brother FIRE is hard :)

[Alternatepriorities]

Proper version of TurboTax will take care of the math for you.  Regardless of the (lack of) capital gains, you're gonna owe the recapture.  Typically it's 25% of the depreciation you have taken over the period in which the property was rented.  Even if you didn't take the depreciation, you still owe the recapture, which is why landlords should ALWAYS take their depreciation as allowed.

I tried helping a friend do his taxes on a very similar sale in turbo tax about a month ago and found it even harder to follow than the IRS forms. No matter what I did I couldn't get it to not tax the capital gains. Unfortunately, he'd used it the previous couple of years and hadn't noticed a typo on the value of the house so turbo tax had been giving him a depreciation of less than $100 per year on that property. Apparently the AI isn't smart enough to question a home value two orders of magnitude lower than normal... I gave up and told him that he needed a real accountant.