Converting a rental to a primary residence

[Dan M.]

Hello all,

Has anyone done this? If so what are some things to consider. My biggest question really is do you have to pay back expenses and depreciation on the conversion, or does the basis just stay lower when you go to sell for primary residence exclusion ( Assuming you live there long enough to qualify ) Any help or pointing me in the right direction would be great. 

[Bill B.]

My understanding of it…

When you sell you have to pay back any depreciation recapture and, because it was a rental first, a pro-rated percent of the gains will be taxable. 

You buy a Rental for $300k and operate it for 5 years with 18% in accumulated depreciation and then convert to your primary for 5 years and sell for $600k. You owe 25% tax on that 18% in depreciation you took and 1/2 of the $300k is taxable even though you lived in it for the last 5 years. (It’s only taxed 50% Because it was a primary 50% of the time, if it was a rental for 7 and primary for 3 it would be 70% taxable.)

If it's a disregarded LLC that shouldn't matter. If it filed it's own taxes get a pro involved and see if the government reaches out for transfer taxes.