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Old 03-02-2015, 03:54 PM
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"Allowed and allowable" depreciation when selling rental home

We owned another home we rented to our daughter for 4 years. After 2 years we changed it to rented not for profit as it was rented far below fair market value. For the first 2 years we used Schedule E. However, we were never able to claim a loss due to our income being higher than 150000. Therefore, our expenses were only allowed up to the amount we received in rents. This amount just covered the mortgage interest and real estate taxes. Depreciation was not allowed. Does this mean I do not have to recapture the depreciation when reporting the sale of the home in 2014 as it was not allowed and allowable for these 2 years? The same thing happened in the third year even though I followed the instructions for Rented Not for Profit. I found a section in Pub 523 page 16 under How to Figure your Taxable Gain or Loss Worksheet question 3a that states "If you have good records to show the IRS did not allow you to take that much depreciation , total the amount you were actually allowed to take." This would mean only the depreciation I will take this year would have to be recaptured. Am I correct? These returns I am referring to are all after 1997.



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Old 03-02-2015, 09:21 PM
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We owned another home we rented to our daughter for 4 years. After 2 years we changed it to rented not for profit as it was rented far below fair market value. For the first 2 years we used Schedule E. However, we were never able to claim a loss due to our income being higher than 150000. Therefore, our expenses were only allowed up to the amount we received in rents. This amount just covered the mortgage interest and real estate taxes. Depreciation was not allowed. Does this mean I do not have to recapture the depreciation when reporting the sale of the home in 2014 as it was not allowed and allowable for these 2 years? =========>> 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. You need to report your not-for-profit rental income on Form 1040 line 21.

aslongas the second home was used as r ental pty even it was rented far below FMV, If you are completing Sch E, you must take depreciation. If you don't take depreciation, the IRS will reduce your basis anyway and you will still have the depreciation recapture. The IRS term for this is depreciation "allowed or allowable," which simply means if you are supposed to take depreciation, they reduce your basis whether you did or not.

If it is truly a rental not for profit, you can skip Sch E and report the rental income on line 21 as other income. On sch A of 10409, i mean only if you itemize deductions,You can deduct the mortgage interest and property taxes. Any additional rental expenses up can be deducted as miscellaneous itemized deductions. However you can only deduct expenses up to the amount of income, no loss is allowed.

The same thing happened in the third year even though I followed the instructions for Rented Not for Profit. I found a section in Pub 523 page 16 under How to Figure your Taxable Gain or Loss Worksheet question 3a that states "If you have good records to show the IRS did not allow you to take that much depreciation , total the amount you were actually allowed to take." This would mean only the depreciation I will take this year would have to be recaptured. Am I correct? These returns I am referring to are all after 1997.=======>>>As mentioned above.



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