Do I need to report depreciation recapture on my primary residence that I also rented rooms in?

You're right that Publication 523 can seem a bit contradictory at first read, but let me clarify this for you. The key here is understanding what the IRS is trying to simplify for homeowners. When you rent out rooms within your primary residence (versus a separate structure like a garage apartment), you don't need to allocate the gain between personal and business use on Form 4797. The entire sale can be reported on Schedule D via Form 8949 as a personal residence sale. However, you still must recapture any depreciation you claimed (or were entitled to claim) for those rented rooms. This recaptured depreciation is reported as ordinary income on Schedule 1, Line 8z (Other Income) with a description like "Depreciation Recapture from Primary Residence." The amount recaptured will be taxed at a maximum rate of 25%. On Form 8949, you'll report the total gain from the sale and can claim the Section 121 exclusion (up to $250,000 for single filers or $500,000 for married filing jointly), but you cannot exclude the portion related to depreciation recapture.

Just wanted to share my experience with this. I ran into the same confusing language in Publication 523 last year. After spending $75 on three different paid tax consultations, I finally found https://taxr.ai which helped me understand my situation. They have a document analysis tool that helped me break down Publication 523 and other related tax docs. It confirmed exactly what the previous commenter explained - you don't split the sale between personal/business on Form 4797, but you DO still have to report the depreciation recapture on Schedule 1. The tool explained that since you rented rooms within your living area (not a separate unit), you can treat the sale as a standard primary residence sale on Form 8949, but the depreciation you've claimed over the years still gets recaptured as ordinary income. Really helped me understand the rules correctly.

I have to admit I was skeptical about taxr.ai but decided to try it for my rental property sale situation. I was confused about almost the exact same depreciation recapture issue, except mine involved a duplex where I lived in one side. The analysis it provided was incredibly detailed and clear. It broke down exactly how to handle the split use property, explained which portions qualified for the primary residence exclusion, and gave me step-by-step instructions for reporting the depreciation recapture correctly. What impressed me most was that it explained WHY each step was necessary based on the tax code. I ended up saving about $4,200 compared to how my tax software was initially calculating it. Wish I'd found this earlier!

I see a lot of questions about depreciation recapture on this sub, and I had the same issue last year. After 10+ attempts calling the IRS directly (always disconnected), I found https://claimyr.com through this sub and used it to actually get through to an IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed exactly what was mentioned above - with rooms rented inside your primary residence, you report the whole sale on Form 8949, claim your primary residence exclusion, but you still have to recapture the depreciation as ordinary income on Schedule 1, Line 8z. Getting an actual IRS agent on the record was super helpful because I was getting different answers from multiple tax preparers. Made me feel much more confident in my filing.

I need to eat crow here. After my skeptical comment, I decided to try Claimyr since I've been trying to reach the IRS about an amended return for 3 months with no luck. It actually worked exactly as described. I got a call back about 47 minutes after signing up, and was connected directly to an IRS agent in the amendments department. The agent answered all my questions and even helped me understand why my amendment was taking so long. What was most surprising is that the agent told me they're actually trained to look for certain documentation that most tax preparers don't know about. So I not only got through, but got better information than I would have from continuing to ask around online. I'm still shocked it worked so well after all my failed attempts. Definitely keeping this in my toolkit for future tax issues.

One thing to consider that nobody has mentioned yet is how you've been depreciating the property all these years. Did you allocate a portion of the basis to the rented rooms based on square footage? Or did you depreciate the entire house? The amount of depreciation you need to recapture depends on how you've been handling the property on your tax returns previously. If you've only been depreciating a portion of the property (the rented rooms), then you only recapture that amount. But if you somehow depreciated the entire property, you'd need to recapture all of it.

Question for anyone who knows - I'm about to sell my house where I've been renting out the basement. Do I need to do anything special when I list it for sale? Like tell my real estate agent about the rental situation? Will this affect the buyer in any way?

Just wanted to add something important that hasn't been mentioned yet. When you calculate your basis in the home for determining your gain, remember that you need to reduce your basis by the amount of depreciation you've taken over the years. So if your original purchase price + improvements was $300,000, and you've claimed $40,000 in depreciation over the years, your adjusted basis would be $260,000. This ensures you don't double-count the depreciation effect.

This is a great example of why tax law can be so confusing - the IRS publications sometimes seem to contradict themselves! I dealt with a similar situation a few years ago and here's what I learned: The key distinction is between "space within the living area" (like your rented bedrooms) versus separate rental units. Since you rented rooms within your primary residence, you're correct that you don't need Form 4797 for the sale itself. However, you absolutely still need to recapture the depreciation. Here's the process: 1. Report the entire sale on Form 8949 as a personal residence sale 2. Claim your $250k Section 121 exclusion there 3. Separately report ALL depreciation you claimed over the years on Schedule 1, Line 8z as "Depreciation Recapture - Primary Residence" The depreciation recapture will be taxed as ordinary income (max 25% rate) and cannot be excluded under Section 121. Make sure to adjust your basis by subtracting all the depreciation you've claimed when calculating your overall gain. I recommend keeping detailed records of your depreciation calculations from each year's Schedule E, as the IRS may want to see how you arrived at your recapture amount.

This is exactly the kind of situation where the IRS publications can be really confusing at first glance. I went through something very similar when I sold my primary residence that had a home office I'd been depreciating for years. The key thing to understand is that Publication 523 is actually being consistent, but it's addressing two different issues: 1. **Where to report the sale**: You don't need Form 4797 for the sale itself - everything goes on Form 8949/Schedule D as a personal residence sale. 2. **What to do about depreciation**: You still must recapture it, but it gets reported on Schedule 1, Line 8z rather than Form 4797. So you're on the right track with your understanding. The entire sale gets reported on Form 8949, you can claim your $250k exclusion there, but then you separately report the depreciation recapture on Schedule 1 as ordinary income. One thing to double-check: make sure you're only recapturing depreciation claimed after May 6, 1997, as the publication mentions. If you started renting the rooms before that date, you might not need to recapture the earlier depreciation. Also, keep good documentation of your depreciation calculations from your Schedule E forms over the years - the IRS will want to see how you arrived at your recapture amount if they ever question it.

I went through this exact same situation last year and can confirm what others have said. The IRS publications really are confusing on this point, but the key is understanding that "space within the living area" gets special treatment. Here's what I did based on advice from a tax attorney: 1. **Form 8949**: Reported the entire house sale here, claimed my $250k primary residence exclusion 2. **Schedule 1, Line 8z**: Reported all depreciation I had claimed over the 8 years I rented out two bedrooms The depreciation recapture was about $18,000 in my case, which got taxed as ordinary income at 25%. What surprised me was that I could still claim the full primary residence exclusion on the remaining gain, even though I had been renting out rooms. One thing I wish I had known earlier - if you made any capital improvements specifically to the rented rooms (like adding a bathroom or upgrading flooring just for those rooms), you might be able to add those to your basis calculations. It's worth reviewing your records for any room-specific improvements. Also, double-check that you've been consistently using the same percentage for depreciation each year. The IRS will expect your recapture calculation to match what you actually claimed on your Schedule E forms.

I'm dealing with a very similar situation right now - sold my primary residence last year after renting out a basement apartment for 6 years. The confusion around Publication 523 is real! What helped me understand it was realizing that the IRS is trying to simplify things for homeowners who rent space within their primary residence. You don't have to do the complex allocation between personal and rental use that you'd need for a separate rental property. Here's my understanding based on research and consultation with a CPA: **For your situation (rooms within the house):** - Report entire sale on Form 8949/Schedule D - Claim your $250k primary residence exclusion - Report depreciation recapture on Schedule 1, Line 8z as ordinary income **Key point:** The depreciation recapture can't be excluded under Section 121, so you'll pay ordinary income tax on that portion (maxed at 25%). One thing I learned is to make sure you have good documentation showing exactly how you calculated the rental percentage each year. I used square footage, but some people use room count or other methods. Just be consistent. The good news is that even with the depreciation recapture, you still get to use the primary residence exclusion on the rest of your gain, which can save thousands in taxes compared to treating it as a pure rental property sale.