Hello,

My wife and I sold a house in June 2013. The home was purchased in 2000 and we lived in it for 2.5 years until 2003. From 2003 to present we have been on qualified extended duty for the U.S. government. Likewise, the property has been rented out since we departed. It was depreciated using the 27.5 year straight line method.

At the sale, I was asked if the property had ever been used for income. Answering affirmative, I subsequently received a 1099-S. My question concerns properly reporting the sale because I received the 1099-S. It should reflect that I do not owe capital gains tax (the gain was less than $500K) and I met the 2 out of 5 year rule due to the qualified extended duty. I do need to pay the depreciation recapture.

I suspect I need to fill out some variation of form 4797 or 8949. How do I do this correctly to reflect no capital gains tax and correct depreciation recapture?

Thanks,

Recapture involves taking the prior depreciation deductions back into income, and it occurs at the sale of a property.As you said, as your pty was rented out before you sold it, you need to recapture unrecaptured depre (it is neither sec 1245 nor sec 1250 depre) as ordinary income taxed at 25%UNLESS your marginal tax rate is lower than 25% when you dispose of the pty; tax rules authorized an exclusion only for the portion of the profit attributable to the residence part, prohibiting any exclusion for profit on the rental part. Recaptured depreciation is taxed at a maximum rate of 25 percent instead of the top rate of 15 percent for long-term capital gains, plus applicable state income taxes. You need to report this recaptured amount on Sch D of 1040/ form 8949, not Form 4797 . On the plus side, you suffer no recapture of other expenses, such as real estate taxes and mortgage interest.
To qualify for relief from recapture, you have to show by “adequate records or other evidence” (usually, past returns should be sufficient) “that the depre deduction allowed was less than the amount allowable.” Then the amount that “you cannot exclude is the amount allowed.To illustrate, assume that your rental home qualified you to claim depreciation, but you can show that you never claimed any. Then there is no reduction of the exclusion amount and no recapture.

Thank you. That makes sense. Well, as much sense as taxes can.

One followup question: How do I handle appliances that were being depreciated (dishwasher, fridge) that I purchased while renting out the property? They were sold included in the sales price of the house.

thanks again,

#1;You need to report them on Sch E of 1040 to reduce your taxable rental income; while small purchases and repairs can be deducted from your taxes, large purchases and expenses must be depreciatated over several years. The IRS issues guidelines for how to depreciate various assets, including not only appliances, but also used appliances. As long as you purchase an appliance for your rental property, it can be depreciated for five years. You begin depreciating in the year in which the appliance was purchased and placed in service. Your purchase price in the beginning year is your cost basis. You are allowed to depreciate the full cost of the appliance in the five years you have it in service at your rental property. Used appliances can be depreciated the same way as new appliances. Your cost basis is what you paid for it, not what it was worth new. You still get five years to depreciate it, until you recover the purchase price fully. If you purchase it and take it out of service in the same year, you cannot depreciate it. In such a case, you would write it off as an expense for the current year. You should stop depreciating your appliances when you have fully recovered your cost basis, even if you continue to use the appliance in your rental property. You also stop depreciating when you retire the appliance from service, even if you have not received the full cost basis at that time. If you begin using the appliance for personal use, you must stop depreciating. A business can use Section 179 to deduct tangible, long-term personal property. However, Section 179 specifically excludes personal property used in *residential rental property. This means that landlords can’t use Section 179 to deduct the cost of items they purchase for use inside rental units for example, kitchen appliances, carpets, drapes, or blinds.In the case of bonus depre., for2008, 2009, 2010 the IRS allows for 50% bonus depreciation for new items purchased for a rental property. What this means is the property owner can take half of the purchase cost (plus sales tax, delivery charges and setup fees) as a depreciation deduction the first year and then take the other half and depreciate it as normal. This results in more than 50% of the cost of the new purchase becoming a depreciation deduction for the first year (bonus half plus the "normal" percentage of the other half). Bonus depreciation applies to new appliances/carpets/window coverings, etc. only, not used. You must tell the IRS on your tax return if you plan NOT to take the bonus depreciation method. If you take bonus depreciation for one item purchased for a property you must take it for all depreciable items for that property purchased in that year.





#2;correct they were included as part of your selling price.