Hi and welcome to our site!If you owned and use the property as your primary residence at least two out of last five years before the sale - you are eligible to exclude the capital gain - up to $250,000 for a single person from taxable income.So be sure to verify exact date when the property was converted to rental and when it was sold - to be sure these requirements are met.
However - because the property was rented - a part of the gain will be attributable to depreciation recapture - and that part is not a capital gain - but will be added to your taxable income and will be taxed as a regular income.
Thank you. How much is attributable to depreciation recapture? How do I figure that?
Residential rental is depreciated over 27.5 years.So if the basis for depreciation purposes is $100k - your estimated depreciation for three years that the property was rented is $100k / 27.5 * 3 = $10.9k That amount should be deducted in previous years - and if your gain is more than that amount - the full amount of depreciation should be recaptured.That is just an illustration example. Your amounts might be different.
How do you determine the basis for depreciation purposes?
For details about excluding the gain from selling your residence - see IRS publication 523 - www.irs.gov/pub/irs-pdf/p523.pdf
I couldn't access that page; there was an error on the page.
Because you already reported rental income during past years - and most likely already deducted depreciation - most likely - you already determined your basis for depreciation purposes. You just need to take a look into your tax returns for these years.In general - if the property was converted from personal to rental - the basis for depreciation is the lesser of your purchase price and the fair market value of the property at the time of conversion.
Try to copy following line and paste into your browser http://www.irs.gov/pub/irs-pdf/p523.pdf
You are welcome.
Please consider following illustration example.Assuming the property was purchased for $100k - that is your basis - and was sold for $140kIt was rented and depreciated three years - total depreciation claimed $10.9k.You made improvements fro $5kSo - your adusted basis is $100k + $5k - $10.9k = $94.1kYour gain is $140k - $94.1k = $45.9From that amount $10.9k will be attributed to depreciation recaptur eand will be taxed as ordinary income.the rest $45.9 - $10.9k = $35k will be taxed as long term capital gain at reduced rate - but if you are eligible - that part of the gain might be excluded from taxable income as mentioned above.