Tax Q: do I need to calculate/pay recapture depreciation?

[Kelly G.]

Hey - I thought I was in the clear - but perhaps not (was about to file my taxes . .  ).  here's the shortest version on my situation:
1) bought a house for mom in 2005 - she lived there til 2011 (not nearly long enough) did not charge rent
2) rented the house maybe 4  intermittent years between 2013 and 2018; filed taxes accordingly with 'income' and 'depreciation'
3) lived in the house between 2018 and 2023 when I sold it: almost exactly 5 years to the day
4) cash (after closing) was @ $240k

A friend suggested that I may need to repay depreciation?  Looked at IRS Pub 523 - very complicated for my little brain.  

Am I frantically redoing my taxes to account for depreciation or am I in the clear (I don't think I am)???  

thanks so much!
Kelly
sold house in WI - live in CO

[Ellis San Jose]

What does your CPA say?

If you lived in the house long enough to be considered Primary residence you may have a Sec 121 exemption.

[Wayne Brooks]

@Kelly G. Yes, you absolutely have to file/pay depreciation recapture for at least the depreciation you took. And of course, you don’t qualify for the full 121 primary cap gains exclusion….from your numbers, 5/18’s (about 28%) of your gain is exempt under the 121 exclusion since you had Non Qualified use for 13 of those 18 years.

This doesn’t consider whatever time, if any, you actually lived in it between 2011 and 2018

[Kelly G.]

@Ellis San Jose thanks for your reply.  I don't have a CPA - hence the Q.  this is/was the only property that was an 'investment'; never needed a cpa!  I'll have to find/read sec 121 . .  .    appreciate your time!

@Wayne Brooks  that was my fear.  since I was under the $250k cap gains for individual - I just didn't think past that!  Oops . . guess I'm not 'playing' tomorrow on a beautiful spring day - I'm sitting at my computer doing taxes . .   what fun!  BTW:  why did you ask if I lived in the house between 2011-2018 - and not 2005??  Also -  you said "non qualified use for 13 of those 18 years" or something close to that.  does it matter if I wasn't depreciating all of those years??  It was only a rental for 4-5 years.  thanks for your time - really appreciate it.

Kelly

[Bill Brandt]

Because it was a rental BEFORE it wa your primary you don’t get 100% tax free treatment. Too many of the investors who came before us moved in to their rentals and sold them tax free. 

You owned the property for 13 years before it was your primary. So you only get tax free gains on the 5/18ths that it wa your primary. So 27.77777778% of your gain is tax free. The other 72.2222222222% is subject to long term capital gains. PLUS 25% depreciation recapture. Your problem is the IRS doesn’t care if you actually took depreciation, only if you qualified for it. So you owe 25% depreciation recapture on the depreciation you should have taken over the first 13 years. 

I don’t know if you can solve this before the deadline. You might want to hire a cpa and have them file for an extension and submit a good guess of what you will owe with the extension so you don’t owe interest/penalties. 

TLDR: take net sales price, minus net purchase price, add in any capex. You owe ABOUT 15% tax on ABOUT 72.22% of that number. Then you owe ABOUT 0.009% per year of the building value per year you should have taken depreciation. (25% tax on 3.636364% of the building value you depreciated.)

good luck. 

[Kelly G.]

@Bill Brandt . .   OMG!!!  Did I screw up!!   do you always have to pay depreciation on a 'second home'??  I mean - what if I had never rented it.  Then it would have just been a second home.    Thanks so much for your time - and wishing me 'luck' - It's 2 days before 'D-day' - I'm gonna need it!!!  Yikes . . . 

[Bill Brandt]

No. You don’t depreciate strictly 2nd/vacation homes, only rental properties. 

[Basit Siddiqi]

Yes, depreciation recapture has to be factored in on the sale of a home that was previously a rental.