Q: I have owned a rental property for several years and plan to move into it soon. When I eventually sell it, I believe I will be eligible to exclude $500,000 of the gain. How do I account for the depreciation I claimed while it was a rental property?
James
A: Confusingly, it depends on what years the depreciation was taken in. For depreciation taken prior to May 6, 1997, it's "recaptured" merely by reducing your allowable capital gain exclusion. For depreciation taken on or after that date, you cannot exclude that depreciation recapture by this method. Rather, you must pay a special capital gains tax rate of 25%. If you have depreciation taken before and after that magic date, you must disaggregate.
Suppose you use your home partly for business/rental and partly as a residence? It depends on whether the business/rental part is separate from the home or not. If the depreciable area is part of the home itself, there is no need to allocate between the two parts (though you may have to pay the capital gains tax described above).
If the depreciable part is separate from the home and you have not used it personally for 24 of the 60 months prior to sale (the use test), then you will have to separately allocate between the personal unit and the business unit. Full recapture must be accounted for with the separate structure.
Suppose you did use it personally? Then it depends if there is business use in the year of sale. If there is, you must treat the sale as if there are two properties. If there is not, then you can treat it in a similar manner to selling a home with a business use portion within it, as described above.
Whew.
I have depreciation taken after May 6, 1997 that I need to give back to the IRS upon selling my home. Where and how do I do this on the tax forms? Turbotax is putting it on Form 1040, line 13 but I get an error message that Asset with dispositon losses cannot be linked to the Home Sale Worksheet and should be left blank on the Asset Entry Worksheet (Residential). I believe the depreciation should be recaptured on Form 1040, line 14 but how do I do this and what supporting form do I need? Thank you!
Posted by: Ann Manley | 2008.04.12 at 02:28 PM