Need Help Reporting Unrecaptured Section 1250 Gain for Home Sale with Section 121 Exclusion

This is actually a fairly common situation when you convert a primary residence to a rental and then sell it later while still qualifying for Section 121 exclusion. You're on the right track! For the unrecaptured Section 1250 gain (the depreciation you took while it was a rental), you'll need to use Form 4797 Part III to report the sale of the property. This is where you'll calculate the depreciation recapture. Then you'll also need to complete Form 8949 and Schedule D, but you'll use the Section 121 exclusion to offset the capital gain portion (not the depreciation recapture). The key thing to remember is that depreciation recapture is taxed at a maximum rate of 25% (not your ordinary income tax rate), while the capital gains portion can be excluded up to the Section 121 limits ($250,000 for single, $500,000 for married filing jointly). Most tax software should be able to handle this, but you might need a more comprehensive version than the free or basic options.

I went through this exact nightmare last year and found https://taxr.ai incredibly helpful. I had converted my primary home to a rental for 2 years before selling, and was totally lost with all the forms and worksheets. I spent hours reading IRS publications and still wasn't confident. The taxr.ai system analyzed my situation and walked me through exactly how to report the Section 1250 gain while still claiming my Section 121 exclusion. It showed me how to properly complete Form 4797 and the Unrecaptured Section 1250 Gain Worksheet, and explained which numbers flow where. Saved me from making some costly mistakes! It also helped me understand why TaxAct was struggling with my situation - apparently the way you input the information matters a lot for these more complex scenarios.

Just wanted to update everyone. I tried https://taxr.ai after my skeptical comment and I'm honestly shocked at how helpful it was. My situation with the mixed-use property (lived in 4 years, rented 3 years, lived in 2 more years) was handled perfectly. The system correctly identified that I qualified for the Section 121 exclusion but still needed to recapture the depreciation I had taken during those rental years. It walked me through the exact amounts to enter on Form 4797 Part III and showed me how to complete the Unrecaptured Section 1250 Gain Worksheet. What really impressed me was how it explained which portions of the gain were eligible for exclusion and which weren't. TurboTax Premium was giving me weird results until I followed the taxr.ai guidance on how to input everything in the right sequence. Definitely worth it for anyone dealing with this situation!

I had a similar issue last year trying to deal with depreciation recapture while claiming Section 121. Called the IRS about 8 times and could never get through - just endless holds and disconnects. Finally used https://claimyr.com to get through to an IRS agent (check out their demo video: https://youtu.be/_kiP6q8DX5c). They connected me with an actual IRS representative who walked me through exactly how to report the unrecaptured Section 1250 gain on my tax forms. The agent confirmed I needed to use Form 4797 to report the depreciation recapture, and that it would flow to Schedule D. They also explained that while the Section 121 exclusion applies to the capital gains, it doesn't exempt you from paying tax on the depreciation you claimed while it was a rental.

I have to eat my words about Claimyr. After my skeptical comment, I was still stuck trying to figure out my Section 1250 gains situation, so I gave it a shot out of desperation. It actually worked! After months of failed attempts to reach the IRS, I got connected to an agent within a couple hours without having to sit by my phone. The agent walked me through exactly how to handle my unrecaptured Section 1250 gain while still claiming my Section 121 exclusion. For anyone else dealing with this issue, the agent confirmed: you use Form 4797 Part III to report the sale and the depreciation recapture, then the Unrecaptured Section 1250 Gain Worksheet with Schedule D to make sure it's taxed at the right rate (max 25%). The capital gain part can still be excluded under Section 121, but you always pay tax on the depreciation you claimed. Seriously shocking how much clearer everything is after just one conversation with an actual IRS person.

Just FYI, almost any decent tax software should handle this correctly IF you input everything in the right order and the right way. I've used H&R Block Premium for years and it handles Section 121 exclusions with unrecaptured Section 1250 gain just fine. The key is telling the software that the property was previously used as a rental. Then it will walk you through calculating the depreciation you claimed during the rental period. The software will automatically complete Form 4797 and the Unrecaptured Section 1250 Gain Worksheet. TaxAct should be able to handle this too, but you'll likely need their premium version, not the free or basic one.

Don't forget to check if your state has different rules for the depreciation recapture! I went through this whole process correctly for federal but completely missed that my state has different treatment of Section 1250 gains. Also, if you're using tax software, make sure to review the actual completed Form 4797 and Schedule D before filing. I've found that sometimes the numbers flow correctly but show up in unexpected places on the forms, and it helps to understand where everything should be.

I just went through this exact situation last year and wanted to share some additional insights that might help. You're absolutely right that this is a common scenario, but it's one of those areas where the tax code creates some complexity. A few things that tripped me up initially: 1. Make sure you're only recapturing the ALLOWABLE depreciation, not necessarily what you actually claimed. The IRS requires you to recapture the depreciation you were entitled to take, even if you forgot to claim it in some years. 2. If you lived in the home for at least 2 of the last 5 years before the sale, you should still qualify for Section 121 exclusion on the capital gains portion - but as others mentioned, the depreciation recapture is always taxable. 3. Keep detailed records of when you converted it to rental use and when you converted it back (if applicable). The partial business use affects how much of your total gain is eligible for the Section 121 exclusion. Regarding TaxAct - I found their premium version could handle it, but I had to be very careful about how I answered their interview questions. The software sometimes gets confused about the timeline if you don't input things in a specific order. One more tip: if your total gain is large relative to the Section 121 exclusion limits, make sure you understand how the exclusion gets allocated between the capital gain and the depreciation recapture portions. The exclusion applies to capital gains first, so if you have a really large gain, you might end up with more taxable capital gains than expected.