Depreciation only on the years you rented out? Or all years?

6 Replies

I have a townhouse and I am planning on renting out one of the bedrooms. I know I have to report this and to take the depreciation exemption. I plan on doing this for the next few years. It is also my primary residence. In other words, I am not using the entire property as an investment property. I just plan on renting a room out for a few years until I get a better job.

However, I am hesitant to do this for two reasons:

1. I heard that once you do this you will always have to pay capital gains tax on the property when you sell. Is this true? I don't want this to be a rental property. This is my home first and foremost. If, say, 15 years from now I have to pay a capital gains tax on a property where I only rented a room out for a couple of years, that would be awful.

2. When you have to pay the 25% recap on depreciation when you sell the house, do you only pay for the years you rented out? Or do you have to pay depreciation on every year you owned the house afterwards, even if you were not claiming the depreciation after you stopped renting out the room?

Thank guys.

Hmmm...I don't think you can take depreciation on a house you are living in even if you rent part of it out. Ask your CPA.  If you cannot take depreciation, you won't have any recapture. Also, if this is your primary residence, IRS allows you to make up to 250K if you are single or 500K if married tax free if you lived there 2 of the last 5 years.

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600
Originally posted by @John Thedford :

Hmmm...I don't think you can take depreciation on a house you are living in even if you rent part of it out. Ask your CPA.  If you cannot take depreciation, you won't have any recapture. Also, if this is your primary residence, IRS allows you to make up to 250K if you are single or 500K if married tax free if you lived there 2 of the last 5 years.

 You have given two bad pieces of advice in this single post.  First, you have to take the depreciation, even if it is on a house you live in.  Second, that sellers exclusion is not applicable for the depreciation recapture.  You always have to pay taxes (at 25%) on it, from my understanding.

OP: I can't imagine that you would have to take the depreciation for the years that you are not renting it out, but I would talk to a CPA to be sure.  They will also be able to tell you what percentage of the house square footage you have to take that depreciation on.

@James Robinson  You will allocate a % of your primary residence that is being used as a rental much like you do a home office.  You will value the property on the day you put the % into service as a rental.  This along with the original purchase price will help to establish your basis.  Report income and expenses correctly and you will have to take depreciation on the % that is rental.  As long as you live in the remainder this is your primary residence and falls under the primary res rules of sec 121. When you sell you will be selling a piece of real estate that is your primary residence and a piece of real estate that is investment.   One will be tax free.  It will not be depreciated.  One will have tax and depreciation recapture unless you do a 1031 into another investment piece.  A good accountant needs to guide you through this.  The information you've been given so far is not quite all accurate.

Thanks for the information guys. Do you know if I would also have to pay the capital gains tax on top of all the depreciation if I stopped renting after a few years?

Originally posted by @Nathan W. :
Originally posted by @John Thedford:

Hmmm...I don't think you can take depreciation on a house you are living in even if you rent part of it out. Ask your CPA.  If you cannot take depreciation, you won't have any recapture. Also, if this is your primary residence, IRS allows you to make up to 250K if you are single or 500K if married tax free if you lived there 2 of the last 5 years.

 You have given two bad pieces of advice in this single post.  First, you have to take the depreciation, even if it is on a house you live in.  Second, that sellers exclusion is not applicable for the depreciation recapture.  You always have to pay taxes (at 25%) on it, from my understanding.

OP: I can't imagine that you would have to take the depreciation for the years that you are not renting it out, but I would talk to a CPA to be sure.  They will also be able to tell you what percentage of the house square footage you have to take that depreciation on.

Thanks! Learn something new every day.

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

@Dave Foster is accurate you are required by IRS to treat as if two separate properties as a percentage of the square footage allocated to your primary and your rental.  Some are under the miss conception that if you don't take your deprecation you won't have to recapture it.  This is not the case if you fail to take the depreciation expense IRS still requires you to recapture what you should have taken in depreciation at ordinary income tax rates.  

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