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Old 06-03-2013, 01:46 PM
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Recaptured Depreciation

Hi,

I have some questions about recapturing depreciation. Currently, our house is taking depreciation because the previous owners had depreciation taken and it was gifted to us (2 people). So if we sold the property in the future, depreciation would be recaptured and so, there is a 25% tax on that and there is an additional tax of 15% for capital gain?

My question is that since the property was given to the two of us and that on each of our tax return the property is stated at full value and depreciation is taken, does that mean each of us will have to pay the tax on the recaptured depreciation and capital gain? Essentially doubling the 25% to 50% and 15% to 30%? Cause I think that is what the tax accountant did and we filed without understanding it cause we assumed he did it right at that time.

My second question is what triggers this potential tax payment. Is it if the house is sold? And does that include transfer of ownership (e.g. I give my 50% ownership to the other owner without anything in return, essentially a gift)?

My third question is that if we keep it till we die and just in our wills give it to the next generation, do they have to pay the recaptured depreciation? Will the FMV at date of latest death be the new cost basis?

Sorry for so many questions, I asked my accountant and he said some confusing stuff but never answered my questions. He went in a loop, I think.

Thanks!



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Old 06-04-2013, 03:20 AM
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Quote:
Originally Posted by jiji2006 View Post
#1:Currently, our house is taking depreciation because the previous owners had depreciation taken and it was gifted to us (2 people).


#2:So if we sold the property in the future, depreciation would be recaptured and so, there is a 25% tax on that and there is an additional tax of 15% for capital gain?

#3:My question is that since the property was given to the two of us and that on each of our tax return the property is stated at full value and depreciation is taken, does that mean each of us will have to pay the tax on the recaptured depreciation and capital gain? Essentially doubling the 25% to 50% and 15% to 30%? Cause I think that is what the tax accountant did and we filed without understanding it cause we assumed he did it right at that time.

#4:My second question is what triggers this potential tax payment. Is it if the house is sold? And does that include transfer of ownership (e.g. I give my 50% ownership to the other owner without anything in return, essentially a gift)?

#5;My third question is that if we keep it till we die and just in our wills give it to the next generation, do they have to pay the recaptured depreciation? Will the FMV at date of latest death be the new cost basis?


#1:As you now own the gifted home for purposes of rental income, you should calculate depreciation on the home for tax purposes. Spreading the cost of the home over a number of years reduces the impact of rental income on tax returns during each year the home is used for that purpose. For residential real estate, you need to calculate depreciation on the home over the 27.5 years you are allowed to deduct it for tax purposes

#2:It depends. A special 25% tax rate applies to real pty gains attributable to depre previously taken and not already recaptured under sec 1250 or sec 1245 rules. Any remaining gain attributable to unrecap depre previously taken, including S/L depre, is taxed at 25% rather than the LTCG rate of 0% or 15%. When your ordinary rate is only 10% or 15% the depre recap will be taxed at 10 or 15% to the extent of the remaining amount in the 10 or 155 tax bracket and then at 25%.If there is no LTCG on the disposition of the home, then no unrecaptured deprec’d be recaptured. I fthere is LTXG on the disposition of thomd , then the LTCG amount’d be reduced by the unrecaptured depre as ordinary income.Say on the sale of the home, the amount of LTCG is $50K and the amount of the unrecap depre is $30K, then $30K ‘d be taxed at 25%(as long as your tax bracket is 25% or higher) and only $20K ‘d be taxed at 15% or 0%(as long as your marginal tax rate is 15% or lower).

#3:No each of you need to pay your own portion; In the example, above, your share of the LTCG recognized on the sale of the home ‘d be $25K(50% of $50K) so on.

#4:ONNLY on the disposition o the home; as long as you keep it, you do not need to recapture recaptured depre.


#5: Then as you'd gift it to them(as you didn't sell it), you do not need to recapture unrecaptured deprec; they'd recapture the unrecaptured depre;

As long as they'd inherit it, thern their cost baiss'd be the FMV at date of latest death or the FMV at alternative valuation date;Valuation date six months (not 180 days) after the date of a person’s death. THe AVD value may be higher or lower than the FMV of the latest death of the grantor.



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Old 06-04-2013, 09:22 AM
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Recaptured Depreciation Follow-up

Thanks! I understand it much better now. So we thought of an example that walks through this. Please correct us at anytime the example is wrong.

For example, the house cost basis when gifted to us (2 people) is $300,000 and the unrecaptured depreciation is $75,000 that is passed on to us. And so, let's say we sell the house after holding onto it for 2 years at the selling price of $800,000 just to make the numbers more different. The LT gain is $500,000 ($800,000-$300,000). The tax owed would be as follows:

Tax owed on recapturing depreciation = $100,000 (assume that we took depreciation for the 2 years that we live there) X 25% = $25,000

LT capital gain = $500,000 - $100,000 (the recaptured depreciation above) = $400,000 x 25% (because we're in the 25% tax bracket now for ordinary income) = $100,000

Therefore, total tax owed at the time of sale is $125,000. Each of us owe $62,500 (50% of the total tax owed).

Am I on the right track? Please correct me if I am wrong.



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Old 06-04-2013, 03:05 PM
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Originally Posted by jiji2006 View Post
#1;For example, the house cost basis when gifted to us (2 people) is $300,000 and the unrecaptured depreciation is $75,000 that is passed on to us. And so, let's say we sell the house after holding onto it for 2 years at the selling price of $800,000 just to make the numbers more different.

#2:The LT gain is $500,000 ($800,000-$300,000). The tax owed would be as follows:

#3;Tax owed on recapturing depreciation = $100,000 (assume that we took depreciation for the 2 years that we live there) X 25% = $25,000

LT capital gain = $500,000 - $100,000 (the recaptured depreciation above) = $400,000 x 25% (because we're in the 25% tax bracket now for ordinary income) = $100,000

Therefore, total tax owed at the time of sale is $125,000. Each of us owe $62,500 (50% of the total tax owed).

.
#1:This means that the adj basis of the home is $225,000;$300K-$75K(accum. Depre)=$225K so your LTCG’d be $575K;$800K-$225K; So, $75K of the $575K ‘d be taxed at 25% and the remaining $500K’d be taxed at 0% or 15% under the special LTCG tax rate rule.In this case, each of you needs to pay 25% tax on 50% of of $75K($32.5K) and$500K($250K).

#2: The LTCG’d be $$575K;$8000K-$225K($3000K-$75K)

#3;Each of you need to pay$45,625; $8,125+(25%*$32,500)+$37,500(15%*$250K)



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Old 06-04-2013, 08:29 PM
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Recaptured Depreciation Follow-up

Thanks for going through the example, it makes more sense now. I never understood about recapture depreciation till now.

I have another question. So if the tax accountant wrote the wrong accumulated depreciation and now, the net book value (adjusted cost basis) is negative, what are the taxes for it? We never realize that this happened till now. Do they get recaptured at time of sale of the house?

For example, the purchase price of the house is $300,000 and accumulated depreciation is $400,000. The adjusted cost basis is negative of $100,000. The problem is that the accumulated depreciation is supposed to be like $150,000. So it was keyed in incorrectly somewhere along the many years. But we still should have depreciation expense every year for tax benefits.

I heard that this is a common problem among many people because some people like me assumed that their tax accountant is competent... So what can be done now to correct it? I read in a post somewhere that we can just change the accumulated depreciation in the next year's return OR just record it as "Other income" in the following years to correct this. What do you think about this?



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Old 06-04-2013, 08:39 PM
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Originally Posted by jiji2006 View Post
#1: So if the tax accountant wrote the wrong accumulated depreciation and now, the net book value (adjusted cost basis) is negative, what are the taxes for it?


#2: We never realize that this happened till now. Do they get recaptured at time of sale of the house?

#3:For example, the purchase price of the house is $300,000 and accumulated depreciation is $400,000. The adjusted cost basis is negative of $100,000. The problem is that the accumulated depreciation is supposed to be like $150,000. So it was keyed in incorrectly somewhere along the many years. But we still should have depreciation expense every year for tax benefits.
#1:the net book value (adjusted cost basis) can NEVER BE NEGATIVE;


#2:as mentioned previously ONLLY ON THE DISPOSIITON OF THE HOME; please read and try to understand those concepts contained in the previous posts as mentioned previously.

#3: Accum deprecation can NEVER BE LARGEE than the cost basis of $300K
i guess you can contact the IRS for more info in detail



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