deprec recapture exceeds gain on primary residence used for rental 2 of 5 years

[nytcpa2012]

Client owned home and lived tin 100% of the space for 3 of the five years. She rented out 80% of the property for the last 2 years of the five, and took depreciation for the 80% space.

Her gain on sale of the home is less than the depreciation recapture amount.  If she uses the primary residence exclusion, does she avoid the gain on the sale but owe back ALL of the depreciation?  Or does she only pay back depreciation (as ordinary income) to the extent of the gain?

[sjrcpa]

Is there a difference in this case?

Gain to the extent of depreciation is taxable.

Gain in excess of depreciation may be eligible for the exclusion.

[nytcpa2012]

opposite of your answer. depreciation recapture amount exceeds gain.

question was does taxpayer have to pay back all depreciation, even more than their gain?

        (then: wise to use the home exclusion even if deprec has to be repaid anyway?

[sjrcpa]

My answer stands.

Read it again.

[nytcpa2012]

right back atcha....clarification needed:

In researching various sources on this question, I'm getting mixed information.  Simplest explanation is that the IRS will consider this to be 2 separate sales.

In that case, the unrented portion and its gain can use the primary residence exclusion, and the accumulated depreciation on the rental portion just reduces basis on that sale.

While that depreciation amount is more than the excluded gain on the primary residence portion of the sale, it wouldn't matter, since those two parts reported separately.

Is that what you're saying?  That's the way I've calculated it for now.

[sjrcpa · Accepted solution]

If this is one property, legally, I'd be inclined to report it as one sale.

Based on your initial post, the gain is taxable, due to depreciation. The only taxable amount would be the total gain. Depreciation in excess of that gain is a nonissue.

Depending on the facts and circumstances, an argument might be paid to bifurcate the sale - one part principal residence and one part rental property. In which case, your conclusion is correct and probably results in more taxable income.

[TaxGuyBill]

Although most assets would be reported as two sales (average personal percentage and average business percentage), one of the Publications seems to indicate that does not apply to real estate (I don't remember which one right now).

Here is an example if it is reported as one sale:

Purchase price $300,000.   Depreciation of $50,000.  Sale price of $280,000.

In that example, they have $30,000 of "Unrecaptured Section 1250 Gain" (capital gain taxed at ordinary rates, up to 25%).

[nytcpa2012]

I've calculated this both ways now just to be safe, and feel comfortable with applying the depreciation and its recapture to the rental portion of the home....thus increasing the tax on that part of the sale.  Thanks for thinking this through with me.