State Specific Question About: DISTRICT OF COLUMBIA (DC)

Can anyone explain the depreciation/recapture process in simple, clear terms? I'm a first-time landlord and am trying to get a handle on the long-term tax implications. I am aware of the 27.5 year mandatory depreciation process, but the real question is that I'm aware of some small wrinkle having to do with nonoccupation for residency purposes beyond 5 years affecting recapture (I think)....that is, if you don't live in a property as a residence for 3 of the past 5 years, you are forced to pay tax on all the potential future profit on the value of the home...do I have that right?

You need a good tax account/CPA. There are so many tax benefits and pitfalls to owning rental real estate. Why learn the hardway when you can use a competant pro to guide you. After a year or two you can branch out on your own and diy.

You do need to see an expert.

Seems like you are confusing the exemption allowed on selling your primary residence and avoiding capital gains taxes with depreciation on rental property.

It's confusing and best explained by a pro accountant who specializes in real estate.

Here, as I understand it, is where you're having a problem.

If the home was your primary residence for 3 of last 5 years, you can take the 250K exemption on capital gains tax when you sell it (500K if you're married). You can take this exemption even if you have rented it for 2 of those years (even the last 2 years). When you converted the home from your primary residence to a rental, you had to establish a "basis" (value) of the house for depreciation purposes. Whatever that value (house only, not land), you depreciate that on the 27.5 year schedule.

When you sell in this situation, you have to "recapture" the depreciated amount. This makes the profit larger on the deal. If your NET profit from selling (sale price less expenses of sale less your acquisition costs and other allowable expenses) is below the 250K (or 500K) amount, no capital gains tax is due providing you meet all other requirements.

The whole thing here is to get your expenses of acquisition, repair, sale costs, etc. to be as high as possible so your profit is as small as possible.

Now with today's market, these large (250 or 500K exemptions) will probably mean that most of us will not pay capital gains taxes in this situation.

If you have a very nice (expensive) place in a very expensive area, maybe that won't apply.

Anyway, it's best to talk to a real expert because there's still a lot of things I didn't cover, like component depreciation, etc.