sell now or rent : tax consequences of renting when MAGI > 150K

[Brian Reese]

I have a condo, purchased 2012 that I have currently on the market. Comparables and recent sales put a FMV between 370K-380K. However I am sensing a change in market activity. While May/June there was a flurry of bidding activity in my area, it has slowed down in July. Condo is priced at 375K and is getting no offers.

I have also recently bought a house, so keeping 2 mortgages active isn't in my best interest. I am quite confident that I will find a buyer at 375K but need to wait . My options are:

1. keep price at 375K and wait

2. drop price to 370K or even 365K (lower than what similar units sold in May'15) to attract buyers but TBD. Not my preferred option.

3. rent

I started a hypothetical rental scenario for tax purposes. I got stuck at the 'Gain or Loss Worksheet' line b :

"Any depreciation you took — or didn't take but could have taken — for any business

or investment (rental) use of your home other than home office use"

So I did Schedule E and Form 8582 and using some ballpark numbers I quickly realized that :

since my MAGI > 150K, I won't be able to take any passive loss deductions on my 1040. 

This means that any depreciation allowable won't help reduce my tax for the given year. 

Question : but does it mean that I still need to pay for depreciation recapture when I sell the condo ? the answer can affect my decision to sell at a lower price or rent it for a year and then sell

-- some numbers to boil it down

Purchase price : 300K

FMV @ time of rental : 375K

Sale in 2016 after 1 year of rental (say) : 375K

Depreciation allowable : 10K

Allowable loss in Schedule E : 0 (b/c of MAGI exclusions)

Profit = 375K - 300K - 5K (closing costs) - 10K (depreciation) = 60K

Depreciation recapture tax = 25% of 10K = 2500

 --- is this correct math ? I think there is something odd by paying a depreciation recapture tax when I did not get any benefits of depreciation b/c of my MAGI exclusions.

thanks

-Brian