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Old 04-08-2014, 10:46 AM
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Carry forward of unused depreciation expense

I owned and recently sold an apartment that I rented to my son. I had a loss, largely due to depreciation, in each of the 2.5 years that I owned the apartment. I believe the depreciation will be added back to my basis when I report the sale, and as a result I will be taxed on that depreciation. I never received any tax benefits from depreciation expenses, since I recorded losses each year that were equal to (or greater than) the depreciation. My income is above $150,000, which affects my ability to take advantage of losses. Will I be able to deduct the disallowed depreciation expenses from the sales price when I report the sale?

Would I have been better off declaring that this apartment was not rented for profit? As a side note, my son paid less than market rent, but I still reported the rent as income.



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Old 04-08-2014, 08:48 PM
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Originally Posted by Janis View Post
I owned and recently sold an apartment that I rented to my son. I had a loss, largely due to depreciation, in each of the 2.5 years that I owned the apartment. I believe the depreciation will be added back to my basis when I report the sale, and as a result I will be taxed on that depreciation. I never received any tax benefits from depreciation expenses, since I recorded losses each year that were equal to (or greater than) the depreciation. My income is above $150,000, which affects my ability to take advantage of losses. Will I be able to deduct the disallowed depreciation expenses from the sales price when I report the sale?

Would I have been better off declaring that this apartment was not rented for profit? As a side note, my son paid less than market rent, but I still reported the rent as income.
I owned and recently sold an apartment that I rented to my son. I had a loss, largely due to depreciation, in each of the 2.5 years that I owned the apartment. I believe the depreciation will be added back to my basis when I report the sale, and as a result I will be taxed on that depreciation. ========>>>>>>>>in general it is true it is called unrecaptured real estate depreciation taxed as ordinary gain at 25% aslongas your tax rate is 25% or higher;however, as longas you take loses , your loses ‘d offset your unrecaptured depreciation. So if the amountof depre recapture exceeds your losses, no tax liability.
I never received any tax benefits from depreciation expenses, since I recorded losses each year that were equal to (or greater than) the depreciation. =======>>>>>>Depreciation must be claimed in the year you are entitled to take it under federal law or you lose it. It does not make sense to skip a depreciation deduction because the IRS imputes depreciation, meaning that even if you don't/can’t claim the depreciation against your property, the IRS still considers the home's basis reduced by the unclaimed annual depreciation. You have the same adjusted cost basis for selling your rental property whether you claim the depreciation deduction or skip it.


My income is above $150,000, which affects my ability to take advantage of losses. Will I be able to deduct the disallowed depreciation expenses from the sales price when I report the sale?======>>>>>>>>I guess it depends. In general, you are only allowed to file an amended return to correct your depreciation amount if any of the following applies: you claimed the incorrect amount because of a mathematical error made in any year; you claimed the incorrect amount because of a posting error made in any year; you have not adopted a method of accounting for property placed in service by you in tax years ending after Dec. 29, 2003; or you claimed the incorrect amount on property placed in service by you in tax years prior to Dec. 30, 2003. If you forgot to take depreciation in a prior year, you would fall within the third category of individuals who would be able to file an amended return. There is no such thing as deferred depreciation. Depreciation as an expense must be taken in the year that it occurs. Depreciation occurs each year, as defined by the IRS guidelines, whether you choose to claim it as an expense or not. Because it is constantly occurring each year, it is best to claim depreciation each year, whether it helps you out or not because you can not take it in a year when it does not occur. While depreciation can not be deferred, oftentimes the business loss that can result from the depreciation expense can be carried back or forward on your taxes. This is known as net operating loss. Depreciation can result in a NOL that can be carried forward, so the depreciation expense is being deferred in a sense.




Would I have been better off declaring that this apartment was not rented for profit? =====>>>>>> If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year.

As a side note, my son paid less than market rent, but I still reported the rent as income.=======>>>>>>You may need to file form 709 The value of the rent imputed to the person who lives lower rent exceeds $14K($28K if you choose gift splitting ) a year.



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