Converting rental property to personal use. After 2 years, sale the rental property.

[chenschuh]

To simply it.

Client had a rental property, he paid for 100,000, 15000 for land; 85000 for house. After more than 28 year, the house all depreciated out. He converted this rental house to personal use. 

After 2 years, he sold this house for 200,000. Do you recapture 85,000 and taxed at his tax rate. The rest is tax free money. Does that sound right? Or do you need to reporte capitalgain 

200,000x.15%- 15000= 15000 capital gain ? 

[TaxGuyBill]

No.  They have "Nonqualified Use" which means part of it will be taxable.  If you fill out that section of the Home Sale worksheet, it should calculate the gain.

As as simplified explanation, let's say it was a rental for exactly 13 years after December 31st, 2008 (that is when the rules changed; the actual calculation uses days) and he owned it exactly 28 years.  Those 13 years are Nonqualified Use, so 13/28ths of the $100,000 profit will NOT be eligible to be excluded (it will be taxable).

[chenschuh]

So, it really doen't matter it was rented out for 28 year. No recaptual  is necessary. just the exclusion amount  ((2000,000-100,000)x 28/13=46000 are taxable as capital gain?

[TaxGuyBill]

No, they still pay tax on the gain due to depreciation. 

There is another rule if there was depreciation before May of 1997 though.  I'm not sure if that applies to your client or not, but the Home Sale worksheet has a spot for it.

[chenschuh]

Sorry it's x 13/28.