Selling Rental Property and Taxes (Investment Property Depreciation Recapture?)
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Selling Rental Property and Taxes (Investment Property Depreciation Recapture?)

(lively music) – [Toby Mathis] Right, if I lived in a home for several years but
moved out 10 years ago and made it into a rental, what are my tax options if I sell it? Do you want to whack this one, too? – [Jeff Webb] Well, your only
tax option is going to be to recognize capital gain or capital loss on the sale of your home. Since you’ve been out of it for 10 years, you’re not entitled to the
$500,000 personal home exclusion. So you’re going to have to just treat it as the sale of an investment. – [Toby] It’s an investment property. Here’s the big thing to think about. When you take a personal residence and you make it into a rental property, which what do you do? You have to do it more
than 14 days a year? – [Jeff] Yeah. I’m assuming in this case that they’re… – [Toby] They’re out and they said they made it into a rental, so, assuming that they’re
renting it for a long time. Um, you have depreciation recapture. Whether or not depreciate
the house or not. This is really messed up. It’s a, you may take depreciation with it. The sucker punch that they get you with is that whether you take
the depreciation or not, you have to recapture the
depreciation regardless. – [Jeff] Yeah, the acute terminology is depreciation allowed or allowable, taken or not. – [Toby] Yep, and so, if you could have – Let’s say you had a house. Let’s say it was a $300,000 property, $200,000 improved value, and you’re renting it out
for over 27 and a half years. You would have 10 years
of that recapture on, I don’t know what the math would be, but let’s just put it this way. It’s not going to be pleasant. – [Jeff] Yeah, about 80, 90 Thousand. – [Toby] 80 or 90 thousand. That would be taxed
depreciation recapture, which, it follows your ordinary bracket and it’s capped at 25%. So, it’s not like it’s earth shattering, but you never wrote it
off in the first place. You’re getting a mystery tax, so. If you did that, I would probably be
looking at a 1031 exchange to avoid recognizing any of it. Um, that’s really your option. It’s an investment or to make it back into a personal residence and the depreciation recapture
you can never get away from even in a personal residence. You can, you have a
capital gains exclusion with a personal residence if you lived in it two out
of the last five years. Um, but that’s not preventative of our depreciation recapture. So, we could have an issue here. A very unpleasant issue for this taxpayer. – [Jeff] Yeah, if you have rental property that you’re not taking depreciation on and you haven’t for a while, let your accountant know because they can do what’s called a change of accounting method where we can expense
that depreciation that you didn’t take in the past. We can fix this. Um, we just don’t want to
get in that year of sale and find out that you may
not have taken depreciation that you should have. – [Tony] Mhm. Uh, well put. This one scares me. That’s one of those little, those little questions where you’re like “oh, you made it into a
rental, I hope you depreciate.” Because it really sucks if you don’t. (lively music)


  • Muhammad Ishaq

    I moved to another state because of job and I rented my house for 2018 and 2019. I am planning to move back to my house at the end of 2019. Should I take depreciation while filing taxes for 2018 ? Thanks

  • Robert Newton

    Client has one family house, he made it into two family and rental one part house for three years out 5 years he owe it, can he still take the whole house as his personal residential.

  • MotoX2005

    What about avoiding capital gains if you sell the property after you have retired and you are no longer getting a paycheck versus while you are still earning one?

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