Can you depreciate your rental house AND claim the $500K primary residence deduction?
I've lived in my house from May 2023 to May 2025 and I'm thinking about turning it into a rental property until May 2027, then selling it. My big question is: can I legally do BOTH of these tax moves: 1) Take depreciation deductions during the 2 years I'm renting it out (May 2025-May 2027) 2) Still qualify for the $500K capital gains exclusion on primary residences when I sell in 2027 (since I'll have lived there 2 out of the previous 5 years) Or do I have to choose one strategy or the other? If anyone knows the answer, could you point me to the specific tax code section? I have an accountant who's decent but I need to be super specific when asking her to do things a certain way. I want to make sure I navigate through Section 1250 correctly. Really appreciate any help on this!
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Kaylee Cook
You can actually do both! The capital gains exclusion for your primary residence under Section 121 of the tax code allows you to exclude up to $500K (married filing jointly) or $250K (single) if you've lived in the home as your primary residence for 2 out of the 5 years before selling. When you convert your home to a rental, you can start taking depreciation deductions under Section 167. This doesn't disqualify you from the primary residence exclusion when you sell. The catch is that you'll need to recapture the depreciation you took (or were entitled to take) when you sell the property. This recapture is taxed at a maximum rate of 25% according to Section 1250. So your plan to live in it May 2023-May 2025, rent it May 2025-May 2027, and sell in May 2027 should work for both benefits - but you'll pay taxes on the depreciation recapture.
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Oliver Alexander
•Thanks for explaining this! Quick question - does the depreciation recapture apply to the entire value of the house or just the portion I've depreciated during the rental period? And what happens if the house actually goes down in value during the rental period?
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Kaylee Cook
•The depreciation recapture only applies to the actual depreciation you've taken (or were entitled to take) during the rental period, not the entire house value. So if you claimed $30,000 in depreciation deductions over those two rental years, you'd pay recapture tax on that $30,000 amount. If your house goes down in value during the rental period, you still have to recapture the depreciation you claimed. The market value doesn't affect your obligation to recapture depreciation. However, if you sell at a loss, that complicates things and you might have a capital loss that could offset other income (subject to limitations).
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Lara Woods
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Adrian Hughes
•Did it actually give you the specific forms you needed to file? I tried something similar but ended up with generic advice that wasn't helpful for my specific situation.
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Molly Chambers
•I'm a bit skeptical... how does it know your specific situation well enough to give accurate advice? This sounds like something that would require a CPA who knows all the details of your finances.
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Lara Woods
•It doesn't replace your forms, but it tells you exactly which forms you need and how to complete the sections related to your question. For example, it explained I needed Form 4797 for depreciation recapture and showed me where to report it. The AI doesn't just give generic advice - you actually upload your specific tax documents and then ask specific questions. It's like having a tax expert look over your shoulder, but it's analyzing the specific numbers in your docs. It's not replacing my accountant, just helping me understand complex situations so I can have better conversations with my tax person.
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Molly Chambers
I was super skeptical about taxr.ai when I first saw it mentioned, but I tried it with my rental property situation that was very similar to yours. I was converting my primary home to a rental and worried about the tax implications. I uploaded my previous return and property docs, and it gave me EXACT code citations for both taking depreciation during rental periods and still qualifying for the capital gains exclusion. What impressed me was how it explained the depreciation recapture in plain English. My accountant was charging me $300/hr for these kinds of questions, but the tool answered everything instantly with the same quality. Definitely saved me money on accountant fees for basic questions.
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Ian Armstrong
If you need more clarity directly from the IRS, good luck getting through on the phone! I tried for WEEKS last year with a similar capital gains question. Then I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c - totally changed the game. They got me connected to an actual IRS agent in about 15 minutes instead of waiting on hold for hours or getting disconnected. The IRS agent confirmed exactly what others are saying here - yes, you can depreciate the property while it's a rental AND still claim the $500K exclusion if you meet the 2-out-of-5 year residency test. They pointed me to Publication 523 which covers this specifically. Seriously worth it to get an official answer straight from the IRS.
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Eli Butler
•How does this service actually work? Is it just paying someone to wait on hold for you? I don't understand how they can get through when nobody else can.
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Marcus Patterson
•This sounds like complete BS. There's no way anyone can magically get through to the IRS faster. They probably just connect you to some random call center person pretending to be IRS.
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Ian Armstrong
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Marcus Patterson
I need to eat my words about Claimyr. After posting that skeptical comment, I was still desperate to confirm my similar situation (converting rental back to primary home), so I tried it. I was seriously shocked when my phone rang 22 minutes later and it was ACTUALLY an IRS agent. The agent confirmed everything about Section 121 (the $500k exclusion) and explained exactly how depreciation recapture works under Section 1250. She even emailed me the relevant pages from IRS Publication 523 that specifically addressed my question. Turns out you definitely CAN do both - depreciate during rental years and still get the exclusion if you meet the 2-of-5 year test. The only catch is paying back the depreciation at the 25% rate when you sell.
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Lydia Bailey
One thing nobody mentioned yet - the cost basis of your house will change after depreciation! Make sure your accountant tracks this carefully. Let's say you bought for $400k and took $30k in depreciation during rental years. Your adjusted basis becomes $370k, which affects your capital gain calculation when you sell. Example: Sell for $600k after taking $30k depreciation - Gain: $600k - $370k = $230k - Apply $500k exclusion: $0 taxable gain - BUT still owe 25% tax on $30k recaptured depreciation This catches so many people by surprise at tax time!
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Mateo Warren
•Thanks for explaining this! So even if you're under the $500k exclusion amount, you still have to pay the depreciation recapture tax? Is there any way around this?
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Lydia Bailey
•Yes, you always have to pay the depreciation recapture tax, even if your gain is fully excluded under the $500k rule. It's completely separate from the exclusion calculation. There's basically no way around it if you've taken depreciation deductions. The IRS designed it specifically to prevent people from getting double tax benefits. You got a tax deduction when you claimed depreciation, so they want some of that back when you sell. The only way to avoid it would be never to rent the property out or never claim depreciation - but if you're renting it, you're required to take depreciation even if you don't claim it! The IRS will calculate recapture based on depreciation you "should have taken" regardless.
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Sofia Price
Just be careful with the timing! The 2-out-of-5 years test is extremely strict. If you're off by even a few days, you could lose the entire $500k exclusion. I'd recommend selling a month BEFORE your deadline to be safe. Also, keep AMAZING records of when you moved out and when the property became a rental. Save utility bills, moving receipts, rental agreements, etc. The IRS loves to challenge primary residence claims.
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Alice Coleman
•Does the 2-out-of-5 years have to be consecutive? Or could it be broken up?
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NebulaNova
•The 2-out-of-5 years doesn't have to be consecutive! You just need to have used the home as your primary residence for a total of 24 months (730 days) during the 5-year period ending on the date of sale. So you could live there for 1 year, rent it out for 2 years, live there again for 1 year, then sell - and still qualify for the exclusion. The IRS counts all periods of primary residence use, even if they're broken up by rental periods or other uses.
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