Hello all. Here’s my question:
I am converting my personal residence to a rental property on Nov 1. As I understand it, as long as I sell the property within 3 years, I will not have to pay capital gains tax (because I lived there 2 of the last 5 years). Will taking depreciation and then having to recapture depreciation when I sell have any effect on taking the tax-free gain?
Is this all correct? Anything else I need to be aware of? Thanks!
It is not tax free gains. You have an exemption of $250K.
No, as long as you meet the two year ownership and occupancy tests when you sell the property, you still qualify for the $250K capital gains exclusion.
Unrecaptured depreciation can not be excluded from taxation, but taking a depreciation expense during your period of rental use does not affect your eligibility for the $250K capital gains exclusion.
As a side note, even if you don’t take the allowable depreciation expense for your period of rental use, the IRS will tax you on it anyway. So, take the depreciation.