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Updated 6 months ago,

User Stats

43
Posts
40
Votes
Arjun S.
  • Rental Property Investor
  • Austin, TX
40
Votes |
43
Posts

IRS Section 121 tax question upon sale

Arjun S.
  • Rental Property Investor
  • Austin, TX
Posted

I purchased my single-family home in 2018 when I was single. From the beginning, I rented out 3 of the 4 rooms while living in the remaining room. In June 2022, I got married and my wife moved in, and around that same time, all the tenants moved out. Since then, we've been using it solely as our primary residence. I claimed about $30,000 in depreciation on my tax return during the rental period. My capital gain, after recapturing depreciation, is approximately $300K. We plan to sell this home and buy a new primary residence next year. What are the tax implications of this sale? Will the rental period be considered a non-qualifying disposition? Given that it was both a rental and a primary residence for 4 years and solely a primary residence for the last 2 years, is my below assessment correct?

- Total 6 yrs  i.e 4 yrs (75% was rental and 25% primary) + 2yrs (100% primary)

- $300k capital gain / 6yrs is the net gain per yr

 - $200K for 4 rental yrs + $100k for 2 primary yrs

- So $150k (75% of $200k) is taxable and the remaining $50K (i.e 25 % primary) + $100K (2 yrs 100% primary) i.e $150k in total will be tax-free? 

Note: I do plan on checking with a qualified CPA before making a jump. But want to get an opinion or a better understanding on how IRS section 121 works in this case

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