Welcome Guest. Register Now!  



Reply
 
LinkBack Thread Tools Search this Thread Display Modes
  #1 (permalink)  
Old 03-15-2012, 10:33 PM
Junior Member
 
Join Date: Mar 2012
Posts: 2
Rental to primary home then sale due to work...depreciation recapture?

Hi! I appreciate all the info on this site!
I have some challenging(to me at least) questions.

We had bought a house that had a garage/studio without cooking facility.

The house was rented out soon after purchase but the garage/studio was kept as our "vacation home" while we resided overseas.
Since 01/01/2009, the only time we didn't use it was because of my work.
We claimed Straight-Line depreciation while rented, no Additional.

I moved from overseas to a hotel in another state in 2010 because of my job.
My family took over the house for 1 year until we bought another house and moved. We later sold the old one at a small gain.

I know we qualify for a reduced maximum exclusion but doesn't "having no Non-qualified Use" count toward the "2 year use" requirement???
If not, I'd have to pay a lot for the depreciation recapture without the income to pay for it...

Also, in that case, do I need to file Form 4797 for 2011 even though rental ended in 2010?
Should the depreciation be included in 4797 line 2(f)? so (g)Gain or loss would be the total gain?
Or is Form 8949 PartII enough?
I think the depreciation is included in 8949 line 3(f) then the (g)adjustment would be the exclusion part of the gain in the negative or is it?

So confusing... Please help!



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #2 (permalink)  
Old 03-16-2012, 08:47 PM
Moderator
 
Join Date: Oct 2010
Posts: 5,236
“I know we qualify for a reduced maximum exclusion but doesn't "having no Non-qualified Use" count toward the "2 year use" requirement???”---->I do not think so. You can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple) as long as you have owned the home and lived in the home for a minimum of two years. Those two years do not need to be consecutive. In the 5 years prior to the sale of the house, you need to have lived in the house for at least 24 months in that 5-year period. In other words, the home must have been your principal residence, not your vacation home. You can use this 2-out-of-5 year rule to exclude your profits each time you sell or exchange your main home. Generally, you can claim the exclusion only once every two years. Some exceptions do apply. If you lived in your house for less than two years, you can exclude a part of your gain on the sale of your house if your work location has changed. This exception would apply if you started a new job, or if you are moved to a new location with your employer.
“If not, I'd have to pay a lot for the depreciation recapture without the income to pay for it... “---->No; UNNLESS you have LTCG, you don’t have to pay unrecaptured depreciation tax on your return. For example, as long as you have LTCL on the sale of the rental pty, you are NOT subject to unrecaptured depreciation rule.ONLY when you sell your pty. for a gain after taking deductions for depreciation, depreciation recapture is used to tax the gain. Because you received a deduction from ordinary income for the depreciation of the asset, any gain you receive, up to the depreciation amount, must be included as ordinary income to offset the earlier deduction.For example,assume that the pty discussed above had an original basis of $100K. The taxpayer took $20K worth of depreciation deductions from your ordinary income over the course of five years. At the end of those five years, the taxpayer’s adjusted basis in the asset had changed to $80K. If the taxpayer then sells the asset for $110K, then she would realize a gain of $30K. Because you received depreciation deductions, you would be required to include the $20K gain as part of your ordinary income. This is a depreciation recapture. However, if you instead sell the property for $70K, because your recomputed basis is $80K, no gain is taxed as ordinary income($70K<$80K) since you have a LTCL, $10K.OR When a rental property is sold, any passive activity losses(or your capita loss c/o if you have) that were not deductible in previous years become deductible in full. This can help offset the tax bite of the depreciation recapture tax. Also, your rental property can be sold as part of a like-kind exchange to defer both capital gains and depreciation recapture taxes. However, depreciation recapture can cause a significant tax impact for people who are selling residential rental properties. Part of the gain will be taxed as a capital gain and may qualify for the maximum 15% rate on long-term gains. The part of the gain that is related to depreciation, however, will be taxed at a maximum 25% rate. Depreciation recapture on real property is nothing more than a specially taxed type of capital gain. As such, it can be offset by capital losses.You do not carryover depre recapture.
“Also, in that case, do I need to file Form 4797 for 2011 even though rental ended in 2010? “---->I guess so as you disposed of the rental pty in 2010, you need to report it o your 2011 return. The sale of an asset used for business purposes, such as a home that is rented for income, is reported on IRS Form 4797.As long as there was any rental activity in the year the property was sold, the rental income and expenses are reported on Schedule E.
“Should the depreciation be included in 4797 line 2(f)? so (g)Gain or loss would be the total gain?
Or is Form 8949 PartII enough?”----> You should skip Parts I and II of Form 4797 since they do not apply to the sale of rental real estate and directly go to PART3 of 4797.You need to fill in line A of Part III, line 19(a)- 19(b) and 19(c) , 20, If you are only reporting one sale on Form 4797, the amount on line 20 will match the amount on line 1. You need to subtract line 22 from line 21 and record the amount on line 2. This is your adjusted basis in the rental home. On line 22, Add depreciation deducted throughout your ownership of the rental property. And th e total gain /loss on 24 needs to be reported on line 30. ALSO calculate and record the depreciation for the rental home in lines 26(a) through 26(g). Rental homes are by definition Section 1250 property. Section 1250 property refers to depreciable real property. There is no depreciation recapture if you used straight line depreciation during your ownership of the rental home. You should determine the difference between the two methods and enter the result on line 26(a). Then., calculate 100 percent of the smaller of line 24 or 26(a) and enter the result on line 26(b). ALSO, subtract line 26(a) from line 24. Since you are completing Form 4797 for the sale of a rental home, skip lines 26(d), 26(e) and 26(f). Enter the result from line 26(b) on line 26(g).Skip lines 25, 27, 28 and 29. These sections do not apply to rental homes.Determine the total gain on all rental properties reported on Form 4797, line 24 and enter the result on line 30. Add line 26(g) for all sales reported on Form 4797 and record on line 31. Subtract line 31 from line 30 and enter the result on line 32 and line 6 (Part I)/ line 7 of Form 4797.If th eamoun ton line 7 is negative,LTCL, then report it on line 11/17 and 1040 line 14 as LTCL.If line 9 is more than zero, then the amoun ton line 9 as a LTCG needs to be reported on Sch D line 11,16, on Form 1040, line 13, and need to complete Form 1040 through line 43 and Qualified Dividends and Capital Gain Tax Worksheet and report the amount on line 44 of 1040. You would report the amount on unrecap section 1259 gain worksheet line 18 on Schedule D Line 19, after completing the unrecaptured Section 1250 worksheet that appears on Page D-8 of the Schedule D instructions. That amount would again figure into the return when you complete the Schedule D tax worksheet, on page D-12 of the Schedule D instructions. If you need to file Form 8949, you should complete Form 8949 before completing line 8, 9, or 10.However, UNLESS you report your sales of rental pty on form 4797, you must file form 8949.
“I think the depreciation is included in 8949 line 3(f) then the (g)adjustment would be the exclusion part of the gain in the negative or is it?”----> No, I do not think so; you need to report the cost or other basis of your rental pty. It is the cost of the property plus purchase commissions and improvements, minus depreciation, amortization, and depletion. For (g), you should enter any necessary adjustments to gain or loss. Enter negative amounts in parentheses. Also you need to enter a code in column (b) to explain the adjustment.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #3 (permalink)  
Old 03-16-2012, 10:51 PM
Junior Member
 
Join Date: Mar 2012
Posts: 2
Thank you

Whoa... Thank you very much for the explanation.
I need more time to fully understand it but just wanted to let you know
that I really really appreciate your generosity in responding promptly and
in details.

I had found Pub. 946 Ch. 4 - Depreciation under MACRS... and was hoping;

"There's no recapture for residential rental and non-residential real property
unless that property is qualified property for which you claimed a SPECIAL
depreciation allowance."

Guess it was wishful thinking...



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
  #4 (permalink)  
Old 03-17-2012, 02:05 AM
Moderator
 
Join Date: Oct 2010
Posts: 5,236
"There's no recapture for residential rental and non-residential real property unless that property is qualified property for which you claimed a SPECIAL depreciation allowance."----->correct. If you rent part of your home, have a home office, or rent a house and have taken out depreciation after May 6, 1997, any gain on the sale of your property up to the amount of depreciation you have taken will be taxable at your normal rate up to a maximum long-term capital rate of 25% as long as you have owned the property for at least one year; otherwise it's taxed at your income tax rate.even if you are in a income tax bracket which is higher than the25% rate, 36% for example, you are still coming out ahead by taking the depreciation deduction. For Example: you sold your house in 2011 for a $120,000 gain. you used your home as a home office and claimed depreciation in the amount of$20,000 on part of your home. Once you sell the house,yu must pay tax on the $20,000 at the rate of 25%. If he held the property for less than 12 months, the tax rate on the depreciation would be at his ordinary income tax bracket.your ltcg is $100k;$120K-$20K.I guess ther is no more sec 1250 depre recapture since the use of S/L method is required for rela pty acquired after 1986. No sec 1250 recap on the disposition of such pty.



Digg this Post!Add Post to del.icio.usBookmark Post in TechnoratiFurl this Post!Reddit! stumble!bookmark in google!Share on Facebook!
Reply With Quote
Ads
Reply


Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

vB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Sale of primary home used as a rental taxreformnow Rental Real-Estate 10 03-27-2013 06:12 PM
Property Rental conversion to Primary Residence and Back to Rental Property jgmeyer Rental Real-Estate 1 01-03-2011 08:47 AM
My rental expenses for renting primary home egmacrae Rental Real-Estate 1 04-16-2010 01:48 AM
Sale of house - was rental, then primary home joespnet Homeowner Tax 0 07-31-2009 05:16 AM
Capital Losses on the sale of Second home turned into Rental Property? emc2005 Capital Gains 1 07-30-2007 05:52 PM

Follow us on Facebook Follow us on Twitter Google Buzz Rss Feeds

» Categories
 
Individual
 » Income
 » IRA/Sep
 » Medical
 
Corporations
 » Payroll
 
Forum for CPAs
 
Financial Planning