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socrateaser
socrateaser, Lawyer
Category: Tax
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Experience:  Retired (mostly)
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I bought a house in Sedona, AZ for 890k in Jan 2004. I put

Customer Question

I bought a house in Sedona, AZ for 890k in Jan 2004. I put down 300 cash and 175k 1031 exchange that was fully depreciated, and a 415 mortgage, intending to live there. However my wife and I became ill, I took a job in Wi, and I rented it out since March 2004 taking annual depreciation.
My question is 2 fold---if I sold it now for 1 million, what could I put in my pocket after depreciation recapture and 6% realtor fee?
But most important I want to know--if I moved there and made it my permanent residence, and then sold say 5 years later, could I exclude all taxes, and if not how much in taxes would I owe and why?
Thanks
Bob
Submitted: 1 year ago.
Category: Tax
Expert:  socrateaser replied 1 year ago.
Hello,

I'm an attorney, not an accountant -- so I don't feel entirely comfortable trying to calculate your capital gain on the property if it is not your principal residence at sale. Moreover, I don't think you have provided all of the information necessary to make the calculation.

However, I can answer the principal residence question, because it is simply a question of tax law. So, I'm wondering if that would be sufficient for you?

Thanks in advance.
Customer: replied 1 year ago.


No. I think I need an accountant/tax lawyer.


My CPA has already calculated the capital gain.


What I really want to know is if I move to the Sedona house and live there 3-5 years, then sell it, do I have to pay any tax, why and how much?


Bob

Expert:  socrateaser replied 1 year ago.
There is no one at justanswer.com who is dual licensed as both a CPA and tax lawyer (as far as I'm aware).

What I really want to know is if I move to the Sedona house and live there 3-5 years, then sell it, do I have to pay any tax, why and how much?

 

A: This is the question that I can answer.

 

Under Treas. Reg. 1.121-2(d), "(d) Depreciation taken after May 6, 1997 —(1) In general. The section 121 exclusion does not apply to so much of the gain from the sale or exchange of property as does not exceed the portion of the depreciation adjustments (as defined in section 1250(b)(3)) attributable to the property for periods after May 6, 1997. Depreciation adjustments allocable to any portion of the property to which the section 121 exclusion does not apply under paragraph (e) of this section are not taken into account for this purpose."

 

The regulation then provides the following example: "On July 1, 1999, Taxpayer A moves into a house that he owns and had rented to tenants since July 1, 1997. A took depreciation deductions totaling $14,000 for the period that he rented the property. After using the residence as his principal residence for 2 full years, A sells the property on August 1, 2001. A's gain realized from the sale is $40,000. A has no other section 1231 or capital gains or losses for 2001. Only $26,000 ($40,000 gain realized—$14,000 depreciation deductions) may be excluded under section 121. Under section 121(d)(6) and paragraph (d)(1) of this section, A must recognize $14,000 of the gain as unrecaptured section 1250 gain within the meaning of section 1(h)."

 

In plain English, if you reside in the property for at least two years as your principal residence, then to the extent that you have a capital gain on sale, you are taxed on the prior depreciation deductions.

 

Hope this helps.

Customer: replied 1 year ago.

Close. So if I paid 895 and then sold it for 895 I would have no tax due?


Or if I sold it for 995 I would have a gain of 100 to pay tax on, or all the previous depreciation [175 plus 11 years of depreciating the house as rental?] make sense?

Expert:  socrateaser replied 1 year ago.

Close. So if I paid 895 and then sold it for 895 I would have no tax due?

 

A: Correct.


Or if I sold it for 995 I would have a gain of 100 to pay tax on, or all the previous depreciation [175 plus 11 years of depreciating the house as rental?] make sense?

 

A: $100K.

 

Hope this helps.

socrateaser, Lawyer
Category: Tax
Satisfied Customers: 34856
Experience: Retired (mostly)
socrateaser and 2 other Tax Specialists are ready to help you
Customer: replied 1 year ago.


So If I sold for 995 I would owe capital gain on 100k only, , but not on the previous depreciation?


I am unclear on that.


Otherwise I think I understand

Expert:  socrateaser replied 1 year ago.
You only owe gain on the recaptured depreciation equal to the gain. If your gain is $100K, and you have $100K or more in previous depreciation (taken after May 6, 1997), then you are taxed on the $100K.

If you have $175K in depreciation, and your gain is $200K, then you can exclude $25K entirely from your capital gain.

Hope this helps.
Customer: replied 1 year ago.


Got it Thanks


Bob

Customer: replied 1 year ago.

And if I have no gain ie I sell it for what I paid, then I have no tax due?

Expert:  socrateaser replied 1 year ago.
Correct.

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