Capitol gains on sale

[Lane Kawaoka]

1) I bought a home in 9/2009 and lived in it for one year. Then I rented it out until current. If I sold it today and made a 100k profit/gain do I pay 80k of the taxes on the gain? If I move back in for 1 more year and avoid it all to qualify for the 2 out of 5 year rule?

2) Also do I have to payback all the depreciation on top of the capitol gains?

[Dave Toelkes]

@Lane Kawaoka

1. If you sold today, you will have two taxable components. Your profit due to appreciation will be taxed at the long term capital gains tax rate applicable to your tax bracket. For most of us, that is the 15% bracket, but it you are a high income earner, your capital gains rate will be 20%. In your scenario, the ong term capital gains tax on $100K profit will be either $15K or $20K.

The second component is the capital gain due to depreciation. The tax rate on unrecaptured depreciation is 25%. If you took all the depreciation you should have taken, then multiply that total amount by 25% to determine the capital gains tax due to depreciation.

2. Yes, the tax on unrecaptured depreciation is separate from the capital gain tax on appreciation. Even if you move back into the property for two more years (not just one) to reestablish your eligibility for the capital gains exclusion before you sell, the tax on unrecaptured depreciation will still be due.

The question you may not have known to ask, is how much of your gain due to appreciation can be excluded if you convert the property to your primary residence for two more years, then sell. Let's pretend everything happens or happened on Jan 1. You bought a property on Jan 1 2009 and lived in the property as your primary residence for one year. On Jan 1, 2010 you converted the property to a rental. On Jan 1, 2015, after your current tenant's lease expires, you move back into the property and live there two more years. On Jan 2, 2017, you sell the property for a $100K profit due to appreciation. During your holding period as a rental, you took all the depreciation you were allowed, let's say $4K per year for four years.

The 25% tax on $16K of unrecaptured depreciation will be $4K. You owned the property for eight years and of that time used the property for as a rental for five years. Since your period of qualified use was three years of eight, you can take the capital gains exclusion on 37.5% of your capital gain due to appreciation ($100K x 37.5% = $37500). The remaining $62500 of profit due to appreciation is taxable as a long term capital gain at either 15% or 20% depending upon your tax bracket.