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 Dear Tax Talk:
We are currently living in a home that we have owned for more than 20 years, and it has been a rental for most of those years. If we have lived in the house as our primary residence for two of the last five years and decide to sell it, do we have to pay back all that money we have depreciated over the years, or do we pay a set tax amount on what was depreciated?
-- Becca
 Dear
Becca,
You actually don't repay the depreciation in money.
Instead you pay tax at a fraction or percentage
of the amount that you have deducted over the
years. One of the great loopholes in the tax law
allows a property owner to occupy a rental unit
as his primary home for a period of two years
and thereafter avoid tax on $250,000 in gain on
its sale. As most of my readers already know,
that $250,000 exclusion becomes a $500,000 gain
exclusion for a married couple.
If you were entitled to take depreciation deductions because you used your home as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997.
Residential real estate acquired after 1985 has a straight line depreciation over 27.5 years. If your property was acquired after 1985, then you have approximately the last 10 years worth of depreciation to recapture as income.
This may come to 36 percent (1/27.5 multiplied by 10 years) of the original cost of the home. The tax on depreciation recapture is a maximum of 25 percent, so that your actual tax dollars may only be 9 percent of the original cost. Note the 9 percent is of the original cost of the home and not the gain you realize.
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