How to compute taxes owed when selling a rental property that was a primary residence

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niar
Posts: 13
Joined: Sun Jun 20, 2021 11:10 pm

How to compute taxes owed when selling a rental property that was a primary residence

Post by niar »

Bought townhome several years back for 260k as primary residence. No improvements done to the property.
Fair market value in 2022 tax bill is 370k
Converted it to rental property on Sept 15 2022
Took maximum allowable depreciation every year.

Assume it was sold within 3yr of converting to rental- Aug 15 2025 for 350k (6% commission and 1% transfer cost)
How to compute estimated taxes owed in this case? (capital gain and depreciation recapture tax)

Assume it was sold after 3yr of converting to rental - Oct 15 2025 for 350k (6% commission and 1% transfer cost)
How to compute estimated taxes owed in this case? (capital gain and depreciation recapture tax)

Can someone help with this. When I google there is so much conflicting information.
Any help is appreciated!
bh1
Posts: 326
Joined: Thu Dec 30, 2021 1:49 pm

Re: How to compute taxes owed when selling a rental property that was a primary residence

Post by bh1 »

Isn't there some rule that if you lived in it for 2 or 3 of the last 5 years, then you can sell it as a home and get a big capital gains discount?
Bogle-Yardie
Posts: 26
Joined: Fri Dec 24, 2021 3:07 pm

Re: How to compute taxes owed when selling a rental property that was a primary residence

Post by Bogle-Yardie »

I think you have to live in the house 2 years out of the last 5 years to claim up to 250k tax free capital gains single or 500k married.
averagelonghorn
Posts: 199
Joined: Sun Aug 26, 2018 8:26 pm

Re: How to compute taxes owed when selling a rental property that was a primary residence

Post by averagelonghorn »

I am NOT a tax expert, but my basic understanding is that you can exclude the gains if you meet the use and ownership test for 2 of the last 5 years, but you will still have to pay the depreciation recapture. I'm hoping my quick and dirty spreadsheet will paste as a table, and hopefully the math will make sense. (OK, don't know how to paste it as a table, tried to format it to at least be legible.)


EDIT: I HAD A MATH ERROR IN FIRST VERSION, (accidentally was subtracting transaction costs to adjust basis, but need to add them)

Purchase Price 260000 260000 Notes
Sales Price 350000 350000
Transaction Costs 24500 24500
Value at start rental 370000 370000
Depre per month 1121 1121
Months as rental 35 37
Total Depreciation 39242 41485
Tax Bracket 24% 24%
Total Dep Recap 9418 9956
Adjusted Basis 275082 274544 Purchase Price + Transaction Costs - Dep Recapture
Cap Gain 74918 75456
Cap Gain Tax 0 11318 (0 if 36 months as rental or less otherwise 15%)

TOTAL TAX ON SALE 9418 21275


Tax bracket is important, as that will effect your depreciation recapture rate, I believe. Also I did not consider whether you'd owe NIIT, that will depend on other income.)
Always a chance I made an error in something here, but its the basics to consider.
Oh also, depreciation is just on the value attributable to the structure, so might have to adjust and take some land value out, but I just went with your values as stated, assuming you don't own much land/common areas as part of the townhouse.
averagelonghorn
Posts: 199
Joined: Sun Aug 26, 2018 8:26 pm

Re: How to compute taxes owed when selling a rental property that was a primary residence

Post by averagelonghorn »

Only just now noticed original post was a month old, so hope the OP is still around to see answer.
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