How is depreciation recapture calculated on a primary residence with a rental unit?

Yes, you're on the right track. When you sell your primary residence that has had depreciation taken on it (whether for a rental portion or home office), you'll need to recapture that depreciation. The way it works is exactly as you calculated - your adjusted basis would be your original purchase price ($375k) minus the total depreciation taken ($62k), which gives you $313k as your adjusted basis. When you sell for $625k, your gain would be $625k - $313k = $312k. Keep in mind that for the portion used as your primary residence, you may qualify for the Section 121 exclusion which allows you to exclude up to $250k ($500k if married filing jointly) of the gain. However, this exclusion doesn't apply to the depreciation recapture. The depreciation you've taken over the years is recaptured at a 25% tax rate, regardless of the Section 121 exclusion.

I went through something similar last year and found that using taxr.ai really helped me figure out my depreciation recapture situation. I had a primary residence where I rented out the basement and had taken depreciation for years. When I was getting ready to sell, I was super confused about how much I would owe. I uploaded my past Schedule E forms to https://taxr.ai and it analyzed my depreciation history and gave me a clear breakdown of what my recapture tax would be. It saved me from a major headache trying to dig through years of records myself!

I was really skeptical about using taxr.ai as mentioned above, but after stressing about my own depreciation recapture situation for weeks, I decided to give it a try. I had a similar setup - part of my house rented out for 6 years with depreciation deductions. The tool actually found that I had been inconsistently calculating depreciation and identified specific years where I had made errors. This helped me understand exactly what my adjusted basis should be. Ended up saving me from potentially underreporting my recapture amount, which could have triggered an audit. The documentation it provided would be super helpful if the IRS ever questions how I calculated my gain. Now I feel much more confident about my upcoming sale.

If you're having trouble getting official clarification on your depreciation recapture situation, try Claimyr. I spent WEEKS trying to get through to the IRS about a similar situation with my duplex property. After 7 failed attempts waiting on hold, I used https://claimyr.com and they got me connected to an actual IRS agent in about 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent walked me through exactly how to calculate my adjusted basis with the depreciation recapture and confirmed that I was still eligible for the primary residence exclusion on part of the gain. Totally worth it for the peace of mind.

I have to eat my words about Claimyr from my comment above. After another frustrating day trying to get through to the IRS about my depreciation recapture questions, I broke down and tried it. I was absolutely certain it wouldn't work, but I was connected to an IRS agent in about 15 minutes. The agent pulled up my records and walked me through exactly how to calculate the depreciation recapture on my property that I've been partially renting out. Confirmed that I need to recapture ALL depreciation at 25% regardless of the Section 121 exclusion. Would have taken me weeks more of trying to get this information on my own. Can't believe I'm saying this, but it was legitimately helpful.

Don't forget to factor in state taxes too! I sold my duplex last year and was so focused on the federal depreciation recapture that I completely overlooked how my state would tax the gain. Some states have different rules for recapture than the federal government. In my case, I ended up owing an additional 7% to my state on top of the 25% federal recapture tax. Make sure you research your state's specific rules or consult with a local tax professional.

Has anyone used the cost segregation approach to minimize depreciation recapture? I've heard you can break down the rental portion into components (appliances, carpet, fixtures) that depreciate faster than the building structure. When you sell, items fully depreciated to zero don't have recapture issues. Might be too late for OP but could help others.

One thing to keep in mind is the timing of when you lived in different parts of the house. The IRS has specific rules about mixed-use properties where part was your primary residence and part was rental. If you've lived in the main part continuously as your primary residence for at least 2 of the last 5 years before selling, that portion should qualify for the Section 121 exclusion. However, for the rental unit portion, even if it's in the same building, the IRS typically treats it as a separate property for tax purposes. This means you'll definitely owe the 25% recapture tax on all depreciation taken for the rental unit, and that portion won't qualify for the primary residence exclusion. For your home office depreciation, this gets a bit more complex - if the office is within your primary residence area and you stop using it as an office before selling, you might be able to apply the Section 121 exclusion to that portion's gain, but you'll still owe recapture tax on the depreciation taken. I'd strongly recommend getting a tax professional to help you allocate the sale proceeds between the different uses of the property to make sure you're calculating everything correctly.

Great question about allocation methods! The IRS typically allows several approaches for determining the split between personal residence and rental portions, but square footage is the most common and defensible method. For example, if your rental unit is 800 sq ft and your total property is 2,400 sq ft, then 33% would be allocated to the rental portion and 67% to your primary residence. This percentage applies to both your original basis and the sale proceeds. However, you can also use other reasonable methods like: - Number of rooms (if they're similar in size) - Fair rental value comparison - Relative assessed values if your local tax assessor breaks them out separately The key is being consistent - whatever method you used when you first started taking depreciation deductions should generally be the same method you use when calculating the sale allocation. Keep good documentation of your methodology because the IRS may ask you to justify your allocation during an audit. One important note: if you've been using a specific percentage on your Schedule E forms over the years for the rental portion, stick with that same percentage for the sale calculation. Changing it could raise red flags.