Converting rental property back to primary residence... and then selling under capital gains exclusion

(I'm deleting relevant information, because my answer will be too short to justify quoting the entire message.

More or less. The non-residence gain is allocated by day, rather than by year. It does appear that the 500k is not affected by use as a rental, only by problems with the use, ownership, or previous qualified sale requirements.

-- Arthur L. Rubin CRTP, AFSP (2015) in Brea, CA

Kennet says "If so, let's say my total gain (after depreciation is accounted for) is 1M."

I hope you're aware that to the extent that the gain on the sale is *from* the depreciation that you took, the gain is not eligible for the exclusion. That much of the gain can't be excluded from income, and that's *before* the 5/9 proration of the gain is computed.

You didn't give us any numbers, so it's not totally clear what you did with the depreciation when you "accounted for" it... It gets "accounted for" by being taxed!

Reference depreciation, I subtracted the total depreciation from my basis as stipulated in the gain/loss worksheet. I then used the same figure added back to my non-residence gain in the taxable gain/loss worksheet (both worksheets on IRS 523.)

One other thing - Schedule D looks to be a little more complex, but if I had $64k in depreciation over the four years it was a rental. When I recapture, does that $64k become ordinary income at my tax bracket in the year I sell the property, or is there a different value used to calculate taxes due on the recaptured amount?

Reference depreciation, I subtracted the total depreciation from my basis as stipulated in the gain/loss worksheet. I then used the same figure added back to my non-residence gain in the taxable gain/loss worksheet (both worksheets on IRS 523.)

One other thing - Schedule D looks to be a little more complex, but if I had $64k in depreciation over the four years it was a rental. When I recapture, does that $64k become ordinary income at my tax bracket in the year I sell the property, or is there a different value used to calculate taxes due on the recaptured amount? ========== You also didn't specifically tell us that you were married and that your wife also qualified, else your exclusion of the CAPITAL gain would only be $250k, applied toward the 5/9 that is personal. You said "I", not "we", so why should we assume you were/are married?

Well, he did say that he expected to be able to realize up to $500,000 of the exemption. He further stated that he knew that figure only applied to married couples. So I thought it was reasonable to draw the conclusion that he is married.

My apologies. Married filing joint.

It's "Unrecaptured Section 1250 Gain". See the Schedule D instructions (line 19 instructions on how to calculate it, the Schedule D Tax Worksheet on the last two pages of the Schedule D instructions on how to use it.)

-- Arthur Rubin CRTP, AFSP in Brea, CA