Tax on depreciation for house?

I was given a home from my parents last year. I claimed depreciation on the house for 2008 and was told by the tax office that when I decide to sell the house I will have to pay a tax on the depreciation claimed during my ownership unless I live in the house for 2 years but since I live in NM and the home is in Maine I don%26#039;t see me using the home except has a summer/fall camp. My question is that my parents owned the house from 1996 - 2007 and also claimed depreciation on the house throughout those years, but since the house was gifted to me and no capital gains had to be claimed do I or my parents have to pay a tax for the years of 1996 - 2007?



Backup. This is an area of common misconceptions.





When you rent a house and depreciate it, the depreciation reduces the basis on your house. While you depreciate it, you get to deduct that depreciation from your income and get to pay lower taxes because of it. When you sell, your gain is coming from two sources. Gain because the value of the house went up is excludable under the sale-of-main home rules (up to $250K if you lived and owned it for 2 of the past 5 years). If you can%26#039;t exclude this gain, after a year, it%26#039;s taxed at no more than 15%. Gain because of depreciation is NOT excludable. It%26#039;s called 1250 gain and is taxed at your regular tax rates, but the tax rate is capped at 25%. (You have to pay the tax back at the regular rate because you deducted it earlier at the regular rate.)





That said, when you were given the house, you were given the gains issues as well. Any capital gains your parents never paid on it are now your problem. You kept their basis when they gave you the property. (IRS pub 551, page 9.)





So yes, you WILL owe the tax on the both the gain from appreciation and the gain from depreciation when you decide to sell.




I believe your tax office is correct.





Depreciation reduces the basis. When you sell, the %26quot;profit%26quot; (sales price minus bases) is taxable income.





The %26quot;exception%26quot; the tax office was quoting is, if it is a personal home, you can exclude $250K of %26quot;profit%26quot; from income. You would have to live in the home two of the last five years to qualify.





Since they seem to be an accurate source of information and have all the details, you could ask them more specific (what if) questions.




What %26quot;tax office%26quot;? The only circumstance that allows you to depreciate real estate is if you are using it to produce income (i.e., renting it out). any claimed depreciation will be adjusted from your acquisition cost basis when you sell it - which will affect any capital gains tax due.




You will have the same basis in the house your parents had. When you sell it you will need to pay the capital gains tax. Any depreciation is a reduction of the basis. Weather you claim the depreciation or not you still need to use it to get your gain so their is no advantage to giving up the deduction from the rental income.





If it isn%26#039;t a rental you can%26#039;t depreciate a home. If you stay more than 14 nights a year you can%26#039;t deduct any rental losses.





The only way out of dealing with this is to use a 1031 exchange. You need to understand them before you do anything else. You need a professional to help set one up.


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