Recaptured depreciation and other tax consequences upon sale of rental

Please help, I am a first-time landlord, and not really by choice, and have some questions about depreciation and capital gains/ losses and other tax consequences when I sell my house.

Here is the backstory in case it is helpful. My fiance and I each have a house and are getting married soon. To put money towards the wedding instead of two mortgages we decided to rent one house out. His mortgage is much cheaper so I moved in with him and we are renting out my townhouse. Lately we have been thinking of selling both of our (smallish, two-bedroom) houses and upgrading to one larger house that will be both of ours together.

So, my monthly mortgage is $1400 and my tenants pay $900 in rent. Therefore I have a monthly loss of $500. I started renting it in July of this year and it looks like I will about break even come tax time, due to claiming depreciation.

I recently had a meeting with a realtor who ran the comps etc. and said that I will probably be able to get about the same amount I paid for the house or maybe a little less. Obviously I would lose money with the fees and commissions, which some of the equity from my fiance’s house would go towards.

So, my question is, if I sell my house, do I have to pay the recaptured depreciation taxes if I sell it at a loss? (In other words, would I have to bring even more money to the table at closing because I rented it out?) Would I be able to claim a loss on the house or no, because it is no longer my primary residence? If I would end up losing more money, would it be fraud to not claim that I rented it out and just treat it as my primary residence? (Which it was for 7 months out of the year and I can still use that address?)

Thanks in advance for any help.

This is where a CPA (Certified Public Accountant) earns their fee. You really need the right advice from an expert, who considers your unique tax liability, your income, etc.

Plus you need to plan WHEN it is most advantageous to get married. Write down all the questions of possible scenarios, then go with your fiance to the CPA appointment. Take lots of notes. Spend a few hundred on the right advice to save maybe thousands.

Good luck on your new plans.


Your cost basis is reduced by the depreciation you took. If the depreciation taken is less than the selling expense, there is a chance you will still have a profit on the sale even though you are selling for less than you originally paid. Without seeing your numbers, we can’t really say whether you will actually have a tax loss on the sale of your property. Should you have a taxable profit, you can still exclude your profit from capital gains taxes due to the sale of a (former) primary residence.

When you sell your primary residence at a loss, you can not claim a capital loss on your tax return. The good thing about converting your property to a rental is that a capital loss on the sale of investment property does reduce your taxable income.

You said that you converted your house to a rental because your mortgage payment was higher. How much rent could your fiance’s home command? Or, put another way, which property would have produced the higher cash flow as a rental?

You and your fiance are paying two mortgage payments anyway, so it would make good business sense to convert the property to a rental that would get the higher market rent.

Personally, I would not sell my house right away if I were in your shoes. What if you sell, and you two break up? Where will you go? Wait to sell until after you are married and have settled into your new home.