Real Estate Live

Kirstin Downey
Washington Post Staff Writer
Friday, February 17, 2006; 1:00 PM

Welcome to Real Estate Live, an online discussion of the Washington area housing market. Post staff writer Kirstin Downey fills in for Post Real Estate editor Maryann Haggerty.

Kirstin Downey has been a business reporter for more than 20 years, covering a wide range of subjects, from retailing to workplace issues to the economy.

She joined The Washington Post in 1988, covering real estate, and has witnessed, firsthand, several market cycles. She's also covered the boom in values in the '80s, when things went up, up, up, and tracked the market down, down, down when it fell in the early '90s, culminating in the banking, savings and loan collapse and the subsequent taxpayer bailout of the nation's financial system. Now things are up once again, with home values at record levels, but people are wondering what the future holds.

Real Estate Mailbag

By Robert J. Bruss
Saturday, February 18, 2006; G02

Q: DEAR BOB: If I move for 24 months into a rental house I've owned for 15 years, can I then sell it as my principal residence to avoid the recapture tax on all the depreciation I've deducted?

-- Elinor W.

A: DEAR ELINOR: Sorry. The only way to avoid the dreaded federal depreciation recapture tax is to make a tax-deferred exchange for a qualifying replacement investment or business property of equal or greater cost and equity.

Converting a rental house into your principal residence will avoid capital gain tax on up to $250,000 (up to $500,000 for a qualified married couple filing a joint tax return). However, the portion of your capital gain that is attributed to the depreciation you deducted during your ownership years remains taxable at the special 25 percent federal recapture tax rate when you sell the property. For details, consult a tax adviser.