Home Sale - Refuse 2021 depreciation to reduce capital gains tax

Forum|Forum|4 years ago
March 5, 2022
2 replies
0 views

We sold our house in 2021. We used it as a rental for part of the year but are able to claim it as our primary residence for at least 2 of the last 5 years (also required to move due to military reassignment, so we get the extra 10 years for exclusion purpose). When I did my 2018-2020 tax returns, I followed the prompts in TurboTax Premier to apply the depreciation for the rental property.

However, now that we sold the home, I am working through the capital gains process. I'm now learning that even if I meet the exclusion rules for selling the home as a primary residence, I will have to pay capital gains tax on depreciation I claimed over the time it was a rental property. The depreciation in 2021 does not impact my income values as significantly when compared to the amount it adds to my capital gains (i.e., I would pay a much larger tax on 2021 depreciation as a capital gain than I would if I didn't claim it in as a rental expense and paid the extra income tax). Yet when I work through the asset information on the home as a rental property, TurboTax Premier forces me to to take the depreciation, because if I don't it removes the home sale and eliminates all previous depreciation from the calculations. How do I refuse claiming depreciation in 2021 on this property, but still work up the home sale worksheet and include 2018-2020's depreciation to calculate my capital gains?

Best answer by ColeenD3

You do not have the option of removing the depreciation. It is considered to be allowed or allowable and must be a consideration in rental property. Even if you never took it, you would still have to recapture it. The fact that at one point it was your primary home, does not change this. Having a military exclusion does not change this either.

ColeenD3Answer

PeaceBLoveAuthor

Thank you for the reply. It's unfortunate a homeowner isn't afforded the option and have to pay for depreciation tax even if they didn't gain any benefit from the depreciation.
Nonetheless, as I was looking more in depth at the details of how the tax is applied, I now think that even if I could exclude the depreciation in the rental income section, it would not make as big a difference as I originally thought. I mean, every little bit would help, but may as well take the hit and press.

DMarkM1

Since you are only working with one year of depreciation, you are correct, it should pretty much be a "wash." Your rental income will be reduced by the depreciation and your gain on the sale increased by the depreciation. If the depreciation wasn't a factor at all you would be in the same place, no reduction in income and no gain on the sale.

**Say "Thanks" by clicking the thumb icon in a post**Mark the post that answers your question by clicking on "Mark as Best Answer"

Carl11_2

Employee

Basically, you're paying taxes on the recaptured depreciation, as it is not included as a part of the exclusion. Rental expenses may reduce the taxable amount, but it has no effect on taxation of the capital gains from the sale that may exceed your exclusion amount.