Moved back into my rental property. Will this help with depreciation recapture?

Question

I have a property that I used as a rental property for about 18 years where I claimed depreciation year after year. Fast forward to 2022 I'm awarded this property in a divorce and now it's my primary residence when I'm claiming primary residence. I'm thinking about selling in the next year and I have read that if I now live in the property for the last 2 of 5 years that I won't pay taxes on the first $250,000. In this scenario is this correct? If so, will there be a recapture higher rate on profit made above that amount?

Any insight would be greatly appreciated.

JD Martin · Answer

Number of years you live there over the number of years you've owned the property as a rental. I think you said 18 years so 2/18 or 1l9 of the $250k exclusion which would be about $28k. So if you make more than that in the sale you'll pay tax on the overage. If you had lived there first, turned it into a rental and then moved back in within a certain time period (I think it's 5 years) and then lived in it again to qualify before selling I think you get the entire exclusion. But you probably want to check all this with a good RE CPA.

Jason Kucharski · Answer

How can I determine the percentage of partial exclusion?

JD Martin · Answer

You're still going to have to recapture the depreciation which is part of your ordinary income, not capital gains. So moving in isn't going to help you there. You are also going to have only a partial exclusion of your capital gains, not the entire 250k because you used the property as an investment for some of those years.