sale of rental turned primary residence

4 Replies

My parents built a house in the late 80s in the San Diego area and rented the house for 15 years. Then in 2002 they remodeled the house and made it there primary residence and lived there for 10 years. At that time they moved to Montana and rented the house for two more years before selling the house. As I understand the tax code if you live in the house 2 of the last 5 years you don't pay any capital gains taxes? am I right? What about re-paying the depreciation for the first 15 years and the last 2 that the house was a rental? 

You are almost correct.  There is a limit on the amount of gain that may be excluded from taxes and there is no exemption for gain due to depreciation  taken since May 1997.  

When a qualifying principal residence is sold, up to $250K capital gain per taxpayer that is due to appreciation can be excluded from taxation.  Capital gain due to depreciation taken since May 1997 is taxable as unrecaptured depreciation.

In your parent's scenario, it would appear that up to five and one half years of depreciation would be taxed at 25% while the profit attributed to appreciation would be excluded from capital gains taxes

Dave NA After more poking about it i come to realize that they only paid about $10,000 on the sale of $434,000. So just like you explained they paid years of deprivation since 1997-2002 and the last two years, about 6-7 years. They made it out to be this huge deal and didn't explain the facts. Thanks for you post, it made me ask all the right questions.

@Eric Doud  

If your parents are filing a joint tax return, then all of their sale profit appears to be excluded from capital gains.  They still have a 25% tax on the unrecaptured depreciation taken since May 1997.  

Dave NA 

Right, they are a little older and get things confused pretty easy, they were complaining that they paid capital gains taxes on the sale and I disagreed with them, thats when I asked the first question on the forums and started to ask them more questions only to find out that they we repaying there depreciation, again thanks for the reply.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.