Capital gains and depreciation recapture question for rental property that became my primary residence again

You're asking some good questions about a somewhat complicated situation. Let me break it down for you: For the capital gains exclusion, you're on the right track. The IRS uses what's called the "ownership and use" test. To qualify for the full exclusion, you need to have owned and used the home as your primary residence for at least 2 out of the 5 years before selling. But when you have rental periods, things get more complex due to the Housing Assistance Tax Act of 2008. Basically, any period after 2008 where the property wasn't used as your primary residence (i.e., when you rented it out) won't qualify for the exclusion. So in your case, with 3 years living + 3 years renting + 2 years living again = 8 years total ownership, you'd be able to exclude 5/8 of your capital gain (the periods you lived there) up to the maximum exclusion amounts. For depreciation recapture, unfortunately, this isn't prorated based on your living situation. Any depreciation you claimed (or were entitled to claim) during the rental period will be subject to recapture at a 25% tax rate when you sell, regardless of whether you moved back in. So that full $24,000 you depreciated will be recaptured.

I recently went through a similar situation with my rental property. Was freaking out about capital gains and tried to figure out the best approach. After spending hours researching, I found this AI tool that specifically analyzes rental property conversions and capital gains scenarios. It's called taxr.ai (https://taxr.ai) and it really helped me understand my options. You just upload your documents or explain your situation, and it gives you a detailed breakdown of your specific tax scenario - including the exact capital gains exclusion you qualify for and all depreciation recapture calculations. Saved me a ton of time trying to figure out those complex prorations and what periods count for the 2-out-of-5 years rule. It also provided me with the specific IRS rules and references that applied to my situation, which was super helpful when I talked to my accountant later.

Just wanted to update everyone. I tried out taxr.ai after seeing it mentioned here, and it was actually super helpful for my similar situation. I uploaded my previous tax returns where I'd been reporting rental income and depreciation, and it gave me a complete analysis of my capital gains situation. It confirmed what others were saying - depreciation recapture isn't prorated (I have to pay tax on all depreciation taken regardless), but it showed me exactly how my capital gains exclusion would be calculated with my split residential/rental use. What surprised me was it also identified some expenses from when I converted back to primary residence that I could use to offset some of the recapture tax. Definitely worth checking out if you're in this complicated rental-to-primary conversion situation.

I had a nightmare trying to get clarification on this exact issue from the IRS directly. Called so many times and kept getting different answers or just waiting on hold forever. I finally used Claimyr (https://claimyr.com) to get through to an actual IRS agent who specializes in property sales. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent confirmed everything mentioned above - the capital gains exclusion is prorated based on qualified use periods, and ALL depreciation taken gets recaptured regardless of whether you convert back to primary residence. The call saved me from making a costly mistake on my taxes. If you're still confused after researching online, getting official confirmation directly from the IRS can give you peace of mind before making big decisions about selling.

I need to apologize for my skeptical comment earlier. After spending 3 hours on hold with the IRS today and getting disconnected TWICE, I gave in and tried Claimyr out of pure frustration. It actually worked exactly as described. I got a text about 45 minutes after signing up saying they had reached an IRS agent, and then my phone rang connecting me directly to a real person at the IRS. The agent was able to pull up my tax history and give me specific guidance on my rental property conversion situation. For anyone dealing with this capital gains/depreciation recapture issue, getting direct confirmation from the IRS is really valuable since there's so much confusing and sometimes contradictory information online. Wish I hadn't been so dismissive before trying it.

Another option to consider is a 1031 exchange if you want to invest in another rental property instead of taking the capital gains hit. You can defer all the capital gains, though you'd still have to pay the depreciation recapture. I did this with a property last year - sold my rental and rolled all proceeds into a new investment property. The key is you need to identify the replacement property within 45 days and close within 180 days. And you need to use a qualified intermediary to hold the funds between sales.

One thing nobody's mentioned yet - if you claimed any rental losses during those 3 years when it was a rental property, check if any of those were suspended passive losses. When you sell the property, you can use those suspended losses to offset some of the gain or recaptured depreciation. This caught me by surprise when I sold my rental last year - had about $8k in suspended passive losses from years where my income was too high to claim the rental losses, and my accountant was able to apply those against my depreciation recapture amount.