Originally Posted by iafctax
The residential rental property was put it in service beginning in 1981.
Is 27.5 years the maximum number of years that I can claim a deduction?
#2;If that is true, I understand that the value of the property should be divided by 27.5 to calculate depreciation.
In my case: property value $28,500 / 27.5 yrs = $1036.36 yearly allowable deduction
To report the recapture I would then multiply the yearly allowable deduction by the number of years. $1036.36 x 27.5 = $28,500.00.
This amount of $28,500.00 should then be reported as taxable asset.
#2;it depends.Property rentals starting after 1980 but before 1987 should use the Accelerated Cost Recovery System
; for residential rental property ,27.5 years, the applicable method is the ACRS; as mentioned previously, depreciation recapture is the way the IRS is able to recapture taxes on all or part of the gain on the disposal of the asset as ordinary income rather than solely as capital gain which is often at a lower rate, 15% or 0% , depending on your marginal tax rate.. Since you earned a benefit by offsetting ordinary income in owning depreciable rental property, the IRS concludes that you must pay them back for that benefit when the property is sold. Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). For example, assume that you give your son section 1250 property on which he took $2K in depreciation deductions, of which $500 is additional depreciation under ACRS(depre under ACRS is more than MACRS). Immediately after the gift, the son's adjusted basis in the property is the same as yours and reflects the $500 additional depreciation. On January 1 of the next year, after taking depreciation deductions of $1K on the property, of which $200 is additional depreciation, the son sells the property. At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son under ACRS). If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation.so you need to recapture the addtl depre $700 as ordinary income and the remainder gain to the extent of SL depre is treated unrecaptured gain taxed at 25%/.
#3;No.As mentioned above; please read the comment below.
note;when you dispose of the rental home, and take a loss due to LTCL or P)AL c/o , then you do not need to recapture your sec 1250 depre.When a rental property is sold, any passive activity losses that were not deductible in previous years become deductible in full. This can help offset the tax bite of the depreciation recapture tax.
Assume that you(after 1986) bought the pty for $800K(70% of it is b/d cost;$560K) five years ago and by using S/L method you took deprecaiiton of $101820;560000/27.5*5 and now you sell it at the end of five years for $900K., then, first, the total amount of deductions claimed during the holding period is computed by taking your annual deductions for depreciation by the number of years claimed (20,364 x 5), or $101,820. Secondly, your adjusted basis is computed by lowering your original basis ,purchase price,$800K, by the amount of deductions claimed (800K – 101,820), or $698,180.And, your “gain” is computed by deducting the adjusted basis from sale price ,$900K(SP) – 698,180, or $201,820. Your gain increases to $201,820, which means that the IRS can collect taxes from you on an additional $101,820, depre recapture, I mean..Since the tax on capital gain income is often less than taxes on ordinary income, rather than merely taxing the investor’s entire amount at the capital gains rate, the IRS instead applies depreciation recapture. This enables you to take the total deductions for depreciation claimed by you back into income and tax it as ordinary income.So, the $101,820 depreciation deductions taken by you is taxed at the cost recovery recapture tax rate, and the remaining $100K (201,820 – 101,820) is taxed at the capital gains rate as sec 1231 gain I mean..For example, as the recapture tax rate is 25%(assume that your marginal tax rate is 25% or higher) ,the maximum allowable, and the capital gains tax rate is say 15%, you would owe the Feds $25,455 (101,820 x .25% as ordinary gain) plus $15K (100K x .15% as your marginal tax rate is higher than 15% if it is 15% or lower then $0 on the gain), or $40,455.Without any consideration for depreciation deductions at all, your tax obligation at the time of sale would compute merely as selling price less purchase price (900K – 800K), or $100K taxed at the LTCG tax rate either 0% or 15% ,depedndng on your marginal tax rate
Several conditions must be met at the time of a rental property sale for the depreciation recapture tax to be levied. The tax event takes place only at the time the asset is disposed of; the depreciable real estate must be sold after one year of ownership otherwise it is considered STCG and recapture doesn’t apply;you must show a recognized gain as a result of the sale as said above ;there is no recapture when the you take a loss. Finally, the amount subject to recapture cannot exceed the gain realized and cannot exceed 25 percent even if your marginal tax rate is higher than 25%.