homestead exclusion, recapture rental house

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homestead exclusion, recapture rental house

KENDRA J.
Minneapolis, MN · Member since 2013 · 32 posts · 9 votes

We own a home that we've rented out for the last 13 years. This house had previously been our primary residence.

We are thinking of moving back into this house for 3 years to save taxes. The house was purchased for $280k 20 years ago has been depreciated $150k over the last 13 years. We currently owe $120k on this house. House would most likely sell for $375 to $400k if sold now.

We will be retiring in 3 years and income will be significantly reduced. Would most likely be selling this house at that time..

Wondering if this makes sense financially to do that and if anyone of you have done something like this.

Any helpful suggestions would be appreciated. thank you!

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    @KENDRA J. First, I’m not a cpa, but....

    -while moving back in may help a little bit, it won’t be much. The 121 exclusion in your case would only exempt a pro rata share of the time you lived in it verses the time it was rental.

    - waiting until you “have lower income” won’t help much as your gain gets added to your income to determine which cap gains bracket you’ll be in.

    -the depreciation recapture will be big hit as it’s taxed as ordinary income, up to a 25% max rate.

    Definitely talk to a cpa before making any decisions based on the tax outcome.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @KENDRA J.

    You will likely be hit with a pretty significant tax bill if you moved in for 3 years and then sold it.

    1) You will be responsible for paying tax on depreciation recapture
    2) Your 121 exclusion is pro-rated since the property was previously a rental property before it turned into a personal residence(even though it was a personal residence initially).

    Talk to a CPA and understand what your tax hit would be.

    You may want to talk to your CPA about an installment plan. This may also give you some added income in your retirement years

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