All Things Tax

All Things Tax

Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.

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Pioneer
Posts: 2
Registered: ‎12-05-2016

Taxes on Sale of Rental Property converted to Primary Residence

Hello,

My question has to do with determining what taxes would be due on a Florida residential property I personally occupied for the last few years, which I am considering selling due to a considerable upcoming medical expense I will incur in or around January of 2017 that will require short term cash for 1 to 2 years for me to live on as well. I've been unable to work for the past two years due to a brain injury I sustained as a Marine, which the V.A. will not cover; so I am looking for creative ways to raise income for an alternative medical treatment. I recall there being a tax break for an individual living 2 of the last 5 years in a home (section 121?); however as I used this home as a rental property, I know the rules are different. I understand something about "depreciation recapture"; however it is my understanding that there is now an additional tax on "non-qualified use" since 2009.

I purchased my house in October 2002, and after initially renting it to my girlfriend for a year, it was used as a rental income property from 2004 until January of 2014 when I personally moved in. It is my understanding then,  that I must pay an addition tax on "non-qualified use" for 2009 when this law was passed up until 2014 (so I am assuming 5 years of non-qualified use).  I know my accountant at the time took the standard depreciation deduction each year so I am assuming the worst case most conservative scenario insofar as taxes are concerned.

Purchased: Oct. 31, 2002 for $130,500 (owned just over 14 years)

Probable Sales Price: $190,000
Minus  - Current Mortgage Debt: $86,348
= $103,652
Minus Est. Closing Costs & Real Estate Commissions - $9500
= $94,152 (Potential Before Taxes Profit)

Thank you SO much in advance for any assistance you might offer, and I sincerely look forward to your reply.

Warm Regards,
James

Tax Pro
Posts: 5,281
Registered: ‎02-23-2016

Re: Taxes on Sale of Rental Property converted to Primary Residence

Hi James,

 

Welcome to the community.

 

You're on the right track.

 

If you lived in your house for at least two out of the last five years and you owned it for at least two out of the last five years then you can exclude the first $250,000 of gain from your income ($500,000 if married and filing jointly).  So if your realized amount on the sale is below $250,000 then you won't owe any tax except on the recaptured depreciation.

 

If you convert a rental into your primary home or convert a primary home into a rental and are eligible to claim the exclusion of gain when the house sells then you must recapture all depreciation and pay the 25% depreciation recapture tax in order to claim the exclusion of gain on the sale.

 

Also, depreciation reduces your basis, so that must be taken into account as well.  This is part of figuring your adjusted basis in the house which you've got to know in order to figure your gain.  Your gain is equal to your amount realized less your adjusted basis.

 

It looks like you'll be selling at a gain, but if you were to end up with a loss on the sale (athough losses cannot be taken on personal use property) then you would not have to pay the depreciation recapture tax.

 

So your calculation would be:

 

Sale Price:  $190,000

Less selling expenses:  (9,500)

Realized Amount:  180,500

Less Your Adjusted Basis:  (What you paid for the house - depreciation & casualty losses + improvements, etc.)

=Gain on Sale

 

With something like this I always recommend meeting with a tax professional and going through the entire situation in person so that everything gets done correctly.  They may even find other deductions and credits that you can take advantage of as well.

 

I hope this helps you out.

 

Louis,

Senior Tax Advisor (Tampa, FL)

Tax Pro
Posts: 1,424
Registered: ‎09-04-2014

Re: Taxes on Sale of Rental Property converted to Primary Residence

[ Edited ]

I'm sorry but I cannot agree with Louis statement that all gain except for the recapture of depreciation can be excluded.

Because of the non qualified use after 2008 until the time you made the home your residence that portion of gain cannot be excluded from income but will be eligible for capital gain treatment. 

Example: you owned the home for 5190 days to date of sale. The non qualified use days ( 2009-date it became your residence) is 

1826 days. Therefore, 35% of the gain, after depreciation recapture, must be taxed too. 

Using your figures and the only adjustment to basis is depreciation and selling expenses. 

Cost.                              $130500

Plus selling expense.        9500

minus depreciation 

allowed or allowable.      37209

 

Basis for sell.                 $102791

sell price.                         190000      

 

Gain.                                 $87209

minus depr taken.            37209 ( this will be taxed at a maximum of 25%)

Amount eligible for

possible exclusion.           $50000.  

Minus non qualified use   17500     ( this will receive long term capital gain treatment)

 

Balance qualified use.       $32500    (this is the amount that can be excluded from taxation for sale of residence)          

Hopefully my figures are calculated correctly as my calculator decided to die on me.         

BettyB
Sr. Tax Analyst
Tax Pro
Posts: 5,281
Registered: ‎02-23-2016

Re: Taxes on Sale of Rental Property converted to Primary Residence

James,

 

You do have to pay long-term capital gains tax on part of gain from the sale since you cannot exclude all of it due to the use of the house as a rental for part of the time.  I left out the non-qualified use piece, so I apoloigize an am glad that Betty caught that.

 

I do hope we've been able to help you out though.

Pioneer
Posts: 2
Registered: ‎12-05-2016

Re: Taxes on Sale of Rental Property converted to Primary Residence

Thank you very much. As I understand it I would pay a maximum of 25% on the $37,209 depreciation taken, and then capital gains tax on $17,500 for non-qualified use given the example given. I am unmarried and only made $28,000 in 2016 (expected to make $32,000 in 2017, with a pay increase in 2018), which is why I am considering selling now as I understand my capital gains tax would only be 15% or so due to my income. As long as the taxes would be less than $15,000, I told myself I should sell this property. I sincerely appreciate your warm friendly assistance =)

Tax Pro
Posts: 1,424
Registered: ‎09-04-2014

Re: Taxes on Sale of Rental Property converted to Primary Residence

You are very welcome.  We are happy to be of assistance and should you have any other questions, feel free to ask. 

Hope you have a Happy Holiday season! 

 

BettyB
Sr. Tax Analyst
Tax Pro
Posts: 5,281
Registered: ‎02-23-2016

Re: Taxes on Sale of Rental Property converted to Primary Residence

As always, you're quite welcome.

Highlighted
Pioneer
Posts: 2
Registered: ‎02-28-2016

Re: Taxes on Sale of Rental Property converted to Primary Residence

Hello LouisH  

 

How can I enter the section 121 exclusion on the form 4797 thru the online software?  

 

I am having trouble entering the section 121 exclusion thru the online software.  Do you have an instruction on this?  

 

Thank you for your help

 

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