Tax question on selling previous primary residence

9 Replies

Hello All,

My husband and I go back and forth about selling our previous primary residence depending on the market come July 2021. We lived in it for two years and once the current tenants lease is up in June 2021 we may sell. I want to calculate taxes if we were to sell, we meet the primary residence 2 out of 5 years for capital gains.

My question is how do I calculate the depreciation we have to reclaim or recapture? We have an accountant but I want to do it myself to get a rough idea up front as this is on our 2019 taxes. Do I use the depreciation and amortization report and add "Building+furniture & fixtures" which is our total schedule E depreciation and amortization for current year or is there more to it? Any guidance on this is appreciated!

We are cash flowing approximately $500 per month but did have a large expense last year and the home is from the 1920’s. I want to weight out all options.

Thank you in advance!

Jessica

Originally posted by @Jessica Seppo :

Hello All,

My husband and I go back and forth about selling our previous primary residence depending on the market come July 2021. We lived in it for two years and once the current tenants lease is up in June 2021 we may sell. I want to calculate taxes if we were to sell, we meet the primary residence 2 out of 5 years for capital gains.

My question is how do I calculate the depreciation we have to reclaim or recapture? We have an accountant but I want to do it myself to get a rough idea up front as this is on our 2019 taxes. Do I use the depreciation and amortization report and add “Building+furniture & fixtures” which is our total schedule E depreciation and amortization for current year or is there more to it? Any guidance on this is appreciated!

We are cash flowing approximately $500 per month but did have a large expense last year and the home is from the 1920’s. I want to weight out all options.

Thank you in advance!

Jessica

It is more complicated than that. The recapture depends on if you have a gain. And not all gain might be recaptured, if allocated properly. Also, Depends on how much gain we are talking about. 

The way you handle the allocation of sales proceeds depends on the amount of recapture.

I am sure you are not going to allocate more than a basis as proceeds to the furnitures because they don’t appreciate. If you did, your recapture would be ordinary income, Not the Unrecaptured 1250 depreciation taxed at the maximum rate of the 25%. 

Also, allocate the sales proceeds to the land because the appreciation on the land doesn't have to recaptured because there is no depreciation on the land.

After all that, your depreciation recapture is less of allocated gain to the building or the depreciation that has been taken so far.

The taxes is dependent on which bracket you fall, if you marginal tax rate is more than 25%, then it’s 25%. If not, it’s less. 


@Ashish Acharya hello and thank you for tour reply! I think I need to understand the definition of recapture a bit more. As for gain, is it as simple as bought for $150K sell for $250K? I understand there’s more to it with commissions, expense etc but I want to just get a ball park to see if it’s even worth considering selling to take advantage that we lived in it for 2 years. Are there specific line items I can look at on our schedule E for that property to calculate? Thanks again!

A tax professional worth his or her salt would not only be able to run a projection but also advise on mitigation strategy.  e.g. QOF investment to defer the 1250 gain, etc.

I don't understand the desire to leave your accountant out of the loop and calculate this on your own...

@Eamonn McElroy hi and thank you! I am not against having our accountant run the numbers but would like to comprehend and give it a try myself, but it sounds like there a lot more factors into the calculation than I thought originally. If the numbers make sense, it might be best to sell to take advantage that we did live in it two out of the five years to avoid capital gains correct? 

That's primarily an investment question.

You should weigh the IRR of holding the property 5 years, 10 years, etc vs selling, taking a haircut on your equity via selling expenses / potential taxes, and reinvesting into something that has a (hopefully) higher....materially higher...IRR to compensate for the haircut.

If this is a good long-term investment, capital gains can become largely irrelevant through well thought-out income and estate tax planning.  1031 exchanges, inheritance, etc.

@Eamonn McElroy thanks again, and completely agree. Potentially selling and making a $100K to then buy a larger investment would be the plan but then again we could utilize a 1031 exchange if the timing is right later down the line. We also may look into getting a investment HELOC to utilize the equity but not have to sell. There are many factors as you know. Thank you

Originally posted by @Jessica Seppo :

@Ashish Acharya hello and thank you for tour reply! I think I need to understand the definition of recapture a bit more. As for gain, is it as simple as bought for $150K sell for $250K? I understand there’s more to it with commissions, expense etc but I want to just get a ball park to see if it’s even worth considering selling to take advantage that we lived in it for 2 years. Are there specific line items I can look at on our schedule E for that property to calculate? Thanks again!

Form 4562, Part III. Column C will have the property's prior year basis. Column G will have the amount depreciated. Take the number in Column C less the number in Column G to get your property's current basis. Compare that to the number you used when you first filed taxes after putting this property to use as a rental.

I'm not a tax accountant, so I more than welcome any corrections to the above. And with that said, I highly recommend using a CPA who is experienced in this field. Although my specialty is not tax... I still am an accountant at a very large asset management firm. I have spent many hours researching this and I still don't feel 100% comfortable making large financial decisions based on my understanding of the tax implications.

@Jessica Seppo

section 121 exclusion(rules on sale of personal residence) are more advantageous than QOF or 1031 exchange.
QOF and 1031 options are good but if you have the option to do section 121, I would normally suggest to do that instead.

The difference is section 121 exclusion allows you to exclude the tax(not on depreciation recapture) while 1031 and QOZ allows you to defer the tax.

@Jessica Seppo , Not to muddy the waters on you even more but.....You can actually take advantage of both the sec 121 exclusion and take up to the first $500K in gain tax free.  And you can 1031 exchange into another property to defer any excess gain and completely avoid depreciation recapture.  Just another alternative :)