Capital Gains on a Primary Home that was converted to a rental

[clarkfan1979]

I bought a primary home in January 2012 and lived in it until August 2015. It has been a rental since August 2015.

If I put on the market and closed in August 2019, it would have been a primary residence for 3 years 7 months and a rental for 4 years and 0 months.

I paid 95K, 4K of closing costs and 16K of repairs, so I'm all in at 115K.

If I sold for 245K, I would pay another 15K in realtor fees and closing costs. Over the past 4 years, I claimed around 10K of depreciation, so I calculated my total profit at 125K.

Would I pay 15% capital gains on the entire 125K? Or, do I get some sort of pro-rated capital gains because the property was my primary residence for 3 years and 7 months, which is roughly 47% of my total ownership period (7 years and 7 months).

 

[terran]

You must have lived in the home as your primary residence for any 2 of the previous 5 years to claim the primary residence capital gain exclusion. It sounds like this doesn't apply to you.

I'm not very familiar with rental tax issues, but even if you were able to claim the primary residence exclusion, I believe you would need to recapture any depreciation you claimed or could have claimed while the house was a rental.

[robartsd]

You must have lived in the home as your primary residence for any 2 of the previous 5 years to claim the primary residence capital gain exclusion. It sounds like this doesn't apply to you.

I'm not very familiar with rental tax issues, but even if you were able to claim the primary residence exclusion, I believe you would need to recapture any depreciation you claimed or could have claimed while the house was a rental.

This is correct. If you had sold the house within 3 years of moving out, you could claim the capital gains exemption for your primary residence. Since the rental use was only after your use as primary residence you would not need to attribute any of the capital gains to the rental use; you could have claimed the exemption on all of the gains after paying the depreciation recapture.

Would I pay 15% capital gains on the entire 125K? Or, do I get some sort of pro-rated capital gains because the property was my primary residence for 3 years and 7 months, which is roughly 47% of my total ownership period (7 years and 7 months).

You will pay depreciation recapture (on $10k in your example) at your ordinary income tax rate (capped at 25%). You will pay your capital gains tax on the remainder ($115k in your example).

You could move back into the home for two years to claim primary residence exemption, but then you'd need to attribute some of the gains to the years the property was a rental. Depreciation recapture will be what it will be regardless of what you do.

[A Fella from Stella]

I'm going through this right now, but with a twist. I lived in the home from 2007-2009, and then rented it as the value kept falling.

Last year the home was flooded and I received $70,000 insurance money to fix it up - almost done.

How does this work with depreciation and taxes if I sell it for what I bought it for 12 years ago?

[robartsd]

I'm going through this right now, but with a twist. I lived in the home from 2007-2009, and then rented it as the value kept falling.

Last year the home was flooded and I received $70,000 insurance money to fix it up - almost done.

How does this work with depreciation and taxes if I sell it for what I bought it for 12 years ago?

Your tax basis started with your purchase price. Once you started using it as a rental you should have claimed depreciation on your taxes, (if you didn't you should look into filing amended returns. Any depreciation you could have claimed reduces your tax basis and this portion of your gains are taxed according to the depreciation recapture rules (currently ordinary income with 25% cap on the rate). If you sell it for what you bought it for, then there will be no additional capital gains to be taxed. If your insurance payment covered the costs of repairs exactly, then it doesn't factor into the tax equation because the damages and insurance cancel each other out. If the repair costs exceeded the insurance payment then the additional costs increase your tax basis. If the insurance exceeded the repair costs, the extra insurance payment is counted as income in the year received.

[bacchi]

You could move back into the home for two years to claim primary residence exemption, but then you'd need to attribute some of the gains to the years the property was a rental. Depreciation recapture will be what it will be regardless of what you do.

The 2 years don't have to be consecutive. The OP could move back into the home for 1 year in August, which would make 2 years total in 8/2020, and all of the capital gains would be excluded.

If the OP moved out due to a job or health, the safe harbor rule will apply and 12/24 of capital gains would be excluded.

[robartsd]

You could move back into the home for two years to claim primary residence exemption, but then you'd need to attribute some of the gains to the years the property was a rental. Depreciation recapture will be what it will be regardless of what you do.

The 2 years don't have to be consecutive. The OP could move back into the home for 1 year in August, which would make 2 years total in 8/2020, and all of the capital gains would be excluded.

If the OP moved out due to a job or health, the safe harbor rule will apply and 12/24 of capital gains would be excluded.

True that the 24 months do not have to be consecutive, but they all have to be in the most recent 5 years at the time of the sale. As of August 2020, the past five years would not include the year ending August 2015. To get any capital gains exclusion, they would need to use the home as a primary residence for 24 more months. You're right that depending on the reason for the move, they may qualify to exclude the non-qualified use as a rental (up to 10 years if due to military service, up to 2 years for other allowed reasons - IRC 121.b.5.C.ii).

[bacchi]

You could move back into the home for two years to claim primary residence exemption, but then you'd need to attribute some of the gains to the years the property was a rental. Depreciation recapture will be what it will be regardless of what you do.

The 2 years don't have to be consecutive. The OP could move back into the home for 1 year in August, which would make 2 years total in 8/2020, and all of the capital gains would be excluded.

If the OP moved out due to a job or health, the safe harbor rule will apply and 12/24 of capital gains would be excluded.

True that the 24 months do not have to be consecutive, but they all have to be in the most recent 5 years at the time of the sale. As of August 2020, the past five years would not include the year ending August 2015. To get any capital gains exclusion, they would need to use the home as a primary residence for 24 more months. You're right that depending on the reason for the move, they may qualify to exclude the non-qualified use as a rental (up to 10 years if due to military service, up to 2 years for other allowed reasons - IRC 121.b.5.C.ii).

Oops, you're right. I had my math wrong.

[M5]

We are also going through this right now. We bought a house in May 2014 and lived in it until May 2017. Has been used as a rental until we put it on the market last week for $80k. I realize we meet the rules to exclude capital gains, but  are a bit confused on the rest of the exclusions since we did turn it into a rental. Are we eligible to exclude the proceeds from our AGI for the year?

[robartsd]

We are also going through this right now. We bought a house in May 2014 and lived in it until May 2017. Has been used as a rental until we put it on the market last week for $80k. I realize we meet the rules to exclude capital gains, but  are a bit confused on the rest of the exclusions since we did turn it into a rental. Are we eligible to exclude the proceeds from our AGI for the year?

Rental use AFTER you moved out does not need to be considered.

[M5]

We are also going through this right now. We bought a house in May 2014 and lived in it until May 2017. Has been used as a rental until we put it on the market last week for $80k. I realize we meet the rules to exclude capital gains, but  are a bit confused on the rest of the exclusions since we did turn it into a rental. Are we eligible to exclude the proceeds from our AGI for the year?

Rental use AFTER you moved out does not need to be considered.

Okay, so the only thing we'll be taxed on is depreciation recapture correct?

[robartsd]

We are also going through this right now. We bought a house in May 2014 and lived in it until May 2017. Has been used as a rental until we put it on the market last week for $80k. I realize we meet the rules to exclude capital gains, but  are a bit confused on the rest of the exclusions since we did turn it into a rental. Are we eligible to exclude the proceeds from our AGI for the year?

Rental use AFTER you moved out does not need to be considered.

Okay, so the only thing we'll be taxed on is depreciation recapture correct?

That sounds like my understanding for federal income taxes.

[JLee]

We are also going through this right now. We bought a house in May 2014 and lived in it until May 2017. Has been used as a rental until we put it on the market last week for $80k. I realize we meet the rules to exclude capital gains, but  are a bit confused on the rest of the exclusions since we did turn it into a rental. Are we eligible to exclude the proceeds from our AGI for the year?

Rental use AFTER you moved out does not need to be considered.

Okay, so the only thing we'll be taxed on is depreciation recapture correct?

That's how I did it when I sold my house last year.  I hope it was right :P