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10-07-2017 10:53 AM
I'm using the H&R Block software to figure my taxes for 2016. I sold a home that I had used as a rental for part of 2015 and 2016. I sold the home for a profit and thought that I could exclude all of the gain of the sale less depreciation for the time the unit was a rental because I met the ownership test, but it looks like the software is saying that I can't exclude a percentage of the gain for when the unit wasn't my main home (when it was a rental.) Is that correct? Am I unable to exclude my gain for the percentage of time I used the home as a rental? Or can I exclude all of the gain just less depreciation?
Thanks for your guidance. -Adam
10-07-2017 01:10 PM
Welcome to the H&R Block community.
Since you rented the house for part of the time that you owned it you will not be able to take the maximum exclusion. Your exclusion is limited to the maximum exclusion normally allowed less all allowable depreciation for the time that the home was a rental whether or not you took the deduction for it. So if you are single your maximum exclusion is equal to the first $250,000 - allowable depreciation. If you had less than $250,000 worth of gain then your exclusion is equal to your total gain less allowable depreciation. It works the same way if you file jointly except that the maximum exclusion normally allowed is the first $500,000. So no matter what you will have some taxable gain (your allowable depreciation is recaptured as taxable gain), but probably not too much since we're only talking about a year or so. Since you have to recapture the depreciation as taxable gain (including all depreciation allowed whether you took the deduction or not) you'll have a little bit of taxable gain no matter how much you can exclude. Depreciation is recaptured at a 25% tax rate, so it will be a little more than your normal capital gains rate.
Here is an excerpt from the IRS on this topic:
"For rental property, the law has additional limits on the amount you may exclude. You may not exclude the part of your gain equal to any depreciation deduction allowed or allowable for periods after May 6, 1997.
Generally, the law allows an annual depreciation deduction on your rental property and you must reduce the basis of the property by the amount of your depreciation deductions. If you don't claim some or all of the depreciation deductions allowable under the law, you must still reduce the basis of the property by the amount allowable before determining your gain on the sale of the property.
The gain attributable to the depreciation may be subject to the 25% unrecaptured Section 1250 gain tax rate. Additionally, taxable gain on the sale may be subject to a 3.8% Net Investment Income Tax."
If you have any other questions I'll be glad to help.
Senior Tax Advisor (Tampa, FL)
10-07-2017 11:45 PM
Thanks so much Louis - this is exactly what I thought.
What I need to know now is how I report the sale in a manner that reflects that I can exclude the gain of the sale only less the depreciation. I'm using the HR Block software and it is seemingly forcing me to pay taxes on the gain for the percentage of time my house was rented. It also has me paying taxes on the entire proceeds from the sale as a business asset. It has otherwise been remarkable useful software, but it is clearly coming up short in my situation, hence my question.
I've tried entering information in a variety of ways so I get it right, but noting seems to work. I would really appreciate anyone willing to advise me on how to complete the forms so that I accurately report the sale of the house which was a rental in a way that results in me only paying taxes on the depreciation. I've also tried doing this without software with the IRS forms, but keep getting stuck.
Sorry for a bit of a rant, but I've extended an extensive amount of mental effort on this issue which I understand intuitively, but can't seem to navigate the paperwork to make it reflect what I want to do, pay taxes on the depreciation, but otherwise exclude my gain.
Thanks so much to anyone who can provide assistance.