Property (Basis, Sale of Home, etc.)
Question: A property was my principal residence for the first 2 of the 5 years ending on the date of the sale of the property. For the last 3 years before the date of the sale, I held the property as a rental property. Can I still exclude the gain on the sale, and, if so, how should I account for the depreciation I took while the property was rented?
You may be able to exclude gain from the sale of the property. The capital gain exclusion associated with the sale of a principal residence requires that you:
- meet the ownership and use tests, and
- not use the exclusion on any other residence during the 2 year period that ends on the date of sale.
If you used and owned the property as your principal residence for 2 years out of the 5 year period ending on the date of sale, you have met the ownership and use tests for the exclusion. This is true even though the property was rental property for the last 3 years before the date of the sale.
For rental property, the law has additional limits on the amount you may exclude; you may not exclude the part of your gain equal to any depreciation deduction allowed or allowable for periods after May 6, 1997.
Generally, you are allowed an annual depreciation deduction on your rental property and must reduce the basis of the property by the amount of your depreciation deductions. If you do not claim some or all of the depreciation deductions allowable under the law, you must still reduce the basis of the property by the amount allowable before determining your gain on the sale of the property.
The gain attributable to the depreciation may be subject to the 25% unrecaptured Section 1250 gain tax rate. Additionally, taxable gain on the sale may be subject to a 3.8% Net Investment Income Tax. For more information, see Net Investment Income Tax FAQs. Refer to Publication 523, Selling Your Home, and Form 4797 (PDF), Sales of Business Property, for specifics on how to calculate and report the amount of gain.
Category: Capital Gains, Losses, Sale of Home
Subcategory: Property (Basis, Sale of Home, etc.)