How can I convert a rental property to primary residence for tax exclusion purposes?

Wait I'm confused about the non-qualified use periods. So if I buy a house now in 2025, rent it out for 3 years until 2028, then live in it for 5 years until 2033 and sell it, how much of the gain would be tax-free? Would I calculate it as 5/8 of the gain? And what happens with depreciation exactly?

For a property purchased in 2025, rented for 3 years until 2028, then used as your primary residence for 5 years until 2033, you'd calculate the exclusion based on the proportion of qualified use. In your example, you'd have 3 years of non-qualified use and 5 years of qualified use, so 5/8 of the gain could potentially be excluded (up to the $250K/$500K limits). Regarding depreciation, when you were renting the property, you should have been taking depreciation deductions on your tax returns (if you weren't, the IRS still considers it "allowed or allowable"). When you sell, you'll need to recapture that depreciation at a 25% tax rate, regardless of the exclusion. This is separate from the capital gains calculation and applies even to the portion of gain you can exclude.

How exactly does taxr.ai work? Do you just input your property info and it calculates everything for you? I've been tracking my rental expenses in a spreadsheet but I'm terrible at understanding all these tax rules.

I'm skeptical about these AI tools for tax advice. How accurate is it really? Seems like something a real CPA should handle, especially with the complexity of rental property conversions.

You basically upload your property documents and answer some questions about your timeline, purchase price, improvements, depreciation taken, etc. Then it creates a detailed analysis showing your projected tax liability based on different selling scenarios. It handles all the complex calculations about qualified vs non-qualified use periods automatically. The accuracy has been impressive in my experience. While I did consult with my CPA, he actually confirmed that the tool's calculations were correct. It's not replacing professional advice, but it helped me understand my options clearly before making decisions. That saved me money since I wasn't paying my CPA hourly to explain basic concepts while I was still in the planning phase.

How does this even work? They just get you through to an IRS agent faster? I didn't think that was possible with how backed up they are.

This sounds like BS honestly. The IRS phone system is completely broken. No way some random service is magically getting people through when millions can't get answers. And even if you do get through, the agents often give wrong information anyway.

They use an algorithm that navigates the complex IRS phone tree and waits on hold for you. When an agent finally picks up, you get a call connecting you directly to them. It's not magic - they've just figured out how to optimize the waiting process so you don't have to do it yourself. I was skeptical too, but it absolutely works. The key difference was that I got through to someone in the specialized property transactions department, not just a general agent. That's why the information was accurate and detailed. I even called back a second time to verify with another agent and got the same answers, which gave me confidence in the information.

Do you know if states also require the depreciation recapture? I'm in Texas if that matters.

Texas doesn't have state income tax, so you're actually in luck and won't have to worry about state-level depreciation recapture. In states with income tax, most follow the federal treatment of depreciation recapture, but the rates vary. For others reading this: states like California, New York, and Massachusetts generally follow the federal rules for depreciation recapture but at their own tax rates. So you'll need to recapture depreciation on both federal and state returns in those states. Always worth checking with a local tax professional about your specific state's rules.

I used TurboTax Premier last year to handle selling my converted property. It asked all the right questions about periods of non-qualified use and prior depreciation, but I needed to have good records of when I converted it, how much total depreciation I took, etc. If your situation is straightforward, the software can handle it, but if you have multiple properties or complex improvements, a CPA might be worth it.

This is such great advice about documentation! I'm just starting to think about this strategy and hadn't considered how important the paper trail would be. Do you think it's worth setting up a separate folder or system specifically for tracking the conversion? Also, would things like changing your address with banks and credit cards help establish the timeline, or is that overkill? I'm realizing there are so many moving pieces to this - between the tax calculations everyone's discussing and now the documentation requirements, it seems like planning ahead is really crucial. Thanks for bringing up this practical aspect!

Absolutely worth setting up a dedicated folder or digital system! I'd recommend both physical and digital copies since you'll need this documentation for years. And yes, changing your address with banks, credit cards, insurance companies, etc. definitely helps establish the timeline - it's not overkill at all. The IRS looks for a pattern of behavior that shows you genuinely converted it to your primary residence, not just a token gesture. So things like: - Updated mailing address with all financial institutions - Homestead exemption applications (if your state offers them) - Any insurance changes from landlord to homeowner policies - Even things like gym memberships or local subscriptions can help I'd also photograph the property before and after any improvements you make post-conversion. These photos can help document both the conversion date and any basis improvements. The more comprehensive your documentation, the stronger your position if questions arise later. One tip: create a simple timeline document that lists all these changes with dates. It makes everything much easier to reference and shows the IRS you were organized and intentional about the conversion.

This is really helpful context about the timing considerations! I hadn't thought about the strategic aspect of when to stop taking depreciation before conversion. That's a great point about running multiple scenarios upfront. One question about the depreciation recapture - does it matter if you actually claimed the depreciation on your tax returns, or does the IRS consider it "allowed to be taken" even if you forgot to claim it in some years? I'm wondering if there's any benefit to going back and amending returns to claim missed depreciation before converting, or if that just increases your eventual recapture liability without much benefit. Also, do you know if there are any differences in how this works for properties purchased through different methods (conventional mortgage vs. cash vs. 1031 exchange)? I'm trying to understand all the variables before I commit to this strategy.