Depreciation recapture: does IRS know or track it, or is it basically an honor system?

That's super helpful but I'm confused about the "allowed or allowable" part. So if I forgot to claim depreciation during those rental years, I'd still have to pay the recapture tax on what I COULD have claimed? That seems unfair if I never got the tax benefit. Also, do you know how long the IRS actually keeps records? Seems wild they'd track something from 15-20 years ago.

Yes, the "allowed or allowable" rule means you're supposed to pay recapture tax on depreciation you were entitled to claim, even if you didn't take the deduction. The reasoning is that you should have taken the depreciation - it's not optional for rental property. The IRS generally keeps records for 7 years, but their systems have improved significantly in tracking property transactions. The safest approach is to maintain your own records of the depreciation you actually took. If you don't have the original returns, you can request transcripts from the IRS, though they may not include all the details you need for periods more than 10 years back.

How does this actually work? Do you upload your old tax returns or something? My situation is complicated because I converted a rental back to primary residence but I've misplaced some of my records from those years.

Sounds suspiciously like an ad. Does it really work for complex situations? I've got a property I rented out for 4 years, then lived in for 2, then rented again for 3 more years. I'm worried the IRS is going to hammer me on the recapture when I eventually sell.

You can upload tax documents you have, but what's really helpful is they can work even if you're missing some returns. They use what information you do have plus their knowledge of tax rules for specific years to rebuild your depreciation history. For complex situations like yours with multiple transitions between personal use and rental, it's actually ideal. Their system accounts for partial year rentals, suspended passive losses, and basis adjustments over time. It creates a comprehensive report showing exactly what you'd need to report for depreciation recapture if you sell. I was skeptical too, but it saved me from both overpaying and potentially triggering an audit from incorrect reporting.

How does this even work? The IRS phone lines are notoriously impossible to get through. What magic are they using to actually reach someone?

This sounds like complete BS. No way some third-party service can magically get you to the front of the IRS phone queue when the rest of us wait for hours or days. And even if you do reach someone, most IRS phone reps give contradictory info anyway.

They use a system that navigates the IRS phone tree and holds your place in line. When an agent is about to pick up, you get connected. No magic - just technology that saves you from listening to hold music for hours. You're right that IRS agents sometimes give different answers. The key is to get your specific question documented with your taxpayer ID so it's recorded. I specifically asked for my depreciation history attached to my SSN, and the agent confirmed my recapture liability. When I eventually sell, I'll have documentation showing I made a good faith effort to comply based on official IRS guidance. That alone provides some audit protection.

Can you really get transcripts from more than 10 years ago though? I thought the IRS only kept those for 7 years? I'm in a similar situation where I rented my house in 2014-2016 and I'm trying to prepare for eventually selling.

You're right about the limitation. The IRS only provides transcripts for the current tax year and the prior three years online through their Get Transcript tool. For older returns, you can request them, but availability gets spotty beyond 7 years. This is exactly why I now keep a dedicated file for each property with copies of all depreciation schedules, improvements, and basis calculations. If you don't have your original returns, you might need to reconstruct the depreciation based on the property value at the time of conversion and the applicable depreciation rates for those years. The 2014-2016 residential rental depreciation would have been based on a 27.5 year schedule using the month-by-month convention.

This is the real answer! The IRS doesn't have the resources to track everything perfectly, but they DO have automated systems that flag mismatches on big transactions like home sales. Better to just pay what you owe than risk the audit lottery. The penalties and interest can be way worse than just paying the original tax.

This is really solid advice. I'm actually in a somewhat similar boat - converted my primary residence to a rental in 2019 and moved back in 2022. Even though I'm not planning to sell anytime soon, I'm already organizing all my depreciation records and keeping detailed files. One thing I learned from my tax preparer is that even if you can't get the exact depreciation amounts from old returns, you can reconstruct them using the property's fair market value when it was converted to rental use and applying the standard 27.5-year depreciation schedule. The IRS expects you to use the "allowed or allowable" calculation anyway, so having the methodology documented is almost as important as having the original forms. Paolo's point about consulting a real estate tax professional is spot on. The few hundred dollars I spent getting my situation reviewed gave me so much peace of mind and a clear roadmap for when I eventually sell.

This is really helpful context about how the recapture calculation works! I didn't realize it was the lesser of depreciation claimed vs. gain on sale - that actually makes me feel a bit better about the potential tax hit down the road. Your point about creating a spreadsheet now is brilliant. I'm definitely going to do that this weekend while the rental period details are still fresh in my memory. Do you happen to know if there's a standard format or specific information I should make sure to include beyond the basics you mentioned? I want to make sure I'm documenting everything a tax preparer would need 15+ years from now. Also, when you say "basis when converted to rental" - is that the fair market value at the time of conversion, or the original purchase price? I've seen conflicting information on this and want to make sure I'm using the right number for the depreciation calculations.

Great question about the basis calculation! For depreciation purposes when you convert a primary residence to rental, you use the LESSER of: (1) your adjusted basis in the property (generally what you paid plus improvements, minus any prior depreciation), or (2) the fair market value at the time of conversion. This is actually a protective rule - it prevents you from depreciating more than what the property was actually worth when you started renting it out. So if you bought your house for $300k but it was only worth $250k when converted to rental, you'd use $250k as your depreciable basis. For your spreadsheet, I'd recommend including: conversion date, fair market value at conversion, original purchase price, cost of any major improvements before conversion, the calculated depreciable basis, annual depreciation amounts, and rental period start/end dates. Also keep records of any improvements made DURING the rental period, as those affect your basis too. One more tip: if you're not sure about the fair market value at the time of conversion, you can use online tools like Zillow estimates, tax assessments, or even get a simple appraisal. Having some documentation of how you determined that value could be helpful if questions arise later.