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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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I just sold my condo in Rhode Island. What can I do, at this

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I just sold my condo in Rhode Island. What can I do, at this point, to avoid capital gains tax? I had lived in the condo for 10 years, then rented it for three.
Thank you.

Lev :

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.

Lev :

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.

Customer:

Thank you. How much is attributable to depreciation recapture? How do I figure that?

Lev :

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.

Customer:

How do you determine the basis for depreciation purposes?

Lev :

For details about excluding the gain from selling your residence - see IRS publication 523 -
www.irs.gov/pub/irs-pdf/p523.pdf‎

Customer:

I couldn't access that page; there was an error on the page.

Lev :

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.

Lev :

Try to copy following line and paste into your browser
http://www.irs.gov/pub/irs-pdf/p523.pdf

Customer:

Thank you.

Lev :

You are welcome.

Lev :

Please consider following illustration example.
Assuming the property was purchased for $100k - that is your basis - and was sold for $140k
It was rented and depreciated three years - total depreciation claimed $10.9k.
You made improvements fro $5k
So - your adusted basis is $100k + $5k - $10.9k = $94.1k
Your gain is $140k - $94.1k = $45.9
From 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.

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