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September 12, 2023
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Depreciation recapture and taxable income if satisfy home ownership exclusion (3/5 year rule)

  • September 12, 2023
  • 1 reply
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Hi all,

 

If my rental property satisfies the 5-year rule (I lived there for first two years as primary residence, then rented it out for 3 years then sell), I know I don't pay capital gains taxes, and need to pay depreciation recapture still.

 

However, how would my total taxable income/adjusted gross income be calculated? Aka which one of the following is it?

 

a - wage income only

b - wage income + depreciation recapture (3* annual amount)

c - wage income + depreciation recapture + capital gain from sale of home

d - others -- please comment

 

I know capital gain won't be taxed, but my main confusion is whether it will be included as total adjusted gross income? Really appreciate some help here as I try to plan for taxes -- in case the sale will push me to a high tax bracket. References to relevant irs rules are even better.

Thanks a lot in advance.

Best answer by Mike9241

technically AGI IS NONE that you listed and assuming you're correct that other than depreciation recapture none of the gain is taxable   

+ wages

+ rental income or - rental loss 

+ the smaller of depreciation recapture or your net gain (taxed at your marginal tax rate but not more than 25%)

+ any other income that would affect AGI

- any other deductions that would affect AGI

this is your AGI

- standard or itemized deductions

this is your taxable income

 

 

since you say the gain over depreciation recapture is fully excludable this adds $0 to AGI and thus taxable income 

 

IRS PUB 523 covers depreciation recapture and the home sale

https://www.irs.gov/pub/irs-pdf/p523.pdf 

1 reply

Mike9241Answer
September 12, 2023

technically AGI IS NONE that you listed and assuming you're correct that other than depreciation recapture none of the gain is taxable   

+ wages

+ rental income or - rental loss 

+ the smaller of depreciation recapture or your net gain (taxed at your marginal tax rate but not more than 25%)

+ any other income that would affect AGI

- any other deductions that would affect AGI

this is your AGI

- standard or itemized deductions

this is your taxable income

 

 

since you say the gain over depreciation recapture is fully excludable this adds $0 to AGI and thus taxable income 

 

IRS PUB 523 covers depreciation recapture and the home sale

https://www.irs.gov/pub/irs-pdf/p523.pdf