Real estate investor has trouble shaking depreciation recapture tax
DEAR BOB: If I move for 24 months into a rental house I’ve owned for 15 years, can I then sell it as my principal residence to avoid the recapture tax on all the depreciation I’ve deducted? –Elinor W.
DEAR ELINOR: Sorry. The only way to avoid the dreaded federal depreciation 25 percent recapture tax is to make a tax-deferred exchange for a qualifying replacement investment or business property of equal or greater cost and equity.
Converting a rental house into your principal residence will avoid capital gain tax on up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return). However, the portion of your capital gain that is attributed to the depreciation you deducted during your ownership years remains taxable at the special 25 percent federal recapture tax rate when you sell the property. For full details, please consult your tax adviser.