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Old 02-15-2014, 03:22 AM
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Unhappy Depreciation Deduction And Recapture

I bought a rental apartment in January 1981 for $28,500.
I sold it in May 2013.
I have no idea the total amount of depreciation that I may have deducted all those years as I don't have copy of my tax returns prior to 2007.
Also, I didn't deduct depreciation every single year.

I've been informed that regardless whether I had claimed depreciation or not, I still have to report a Depreciation Recapture for the "allowable" amount.

If that is the case, how much Depreciation Recapture should I report?
If I am understanding what I am reading the recapture amount would be equal to the amount I paid for the property. Is that possible?

Please help. This is driving me nuts.



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Old 02-15-2014, 04:45 AM
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Originally Posted by iafctax View Post


#1;Also, I didn't deduct depreciation every single year.

#2;I've been informed that regardless whether I had claimed depreciation or not, I still have to report a Depreciation Recapture for the "allowable" amount.

#3;If that is the case, how much Depreciation Recapture should I report?


#4;If I am understanding what I am reading the recapture amount would be equal to the amount I paid for the property. Is that possible?

Please help. This is driving me nuts.
#1;Whether or not you deducted your depre on the rental pty, the IRS still considers the home's basis reduced by the unclaimed annual depre. You have the same adjusted cost basis for selling your rental property whether you claim the depreciation deduction or skip it.If you forgot to take depreciation in a prior tax year, you must amend your tax return.

#2;correct.
#3;I guess you misunderstand the concept of depre recapture, sec 1250 rule, I mean,depre recap is a tax provision that allows the IRS to collect taxes when you dispose of your rental pty that you had previously used to offset taxable income. As you own rental property, you can use the depre of the property to offset taxable income. In doing so, you lower your basis in the property so that when the property is sold, your gain is computed based on the selling price minus your purchase price and all depreciation that you previously claimed. So when you dispoe of it, you need to calculate your depreciation recapture liability; depreciation recapture is taxed as ordinary income taxed at 25% aslongas your marginal tax rate is 25% or higher. Aslongas you forgot to take depreciation in a prior tax year, you must amend your tax return. Depre must be claimed in the year you are entitled to take it under federal law or you lose it In general, you are only allowed to file an amended return to correct your depreciation amount if you claimed the incorrect amount because of a math error made in any year; you claimed the incorrect amount because of a posting error made in any year; or you claimed the incorrect amount on property placed in service by you.


#4;No; as mentioned above, depre recapture can cause a significant tax impact for you who are selling residential rental property. Part of the gain will be taxed as a capital gain and may qualify for the maximum 15% rate on LTCG. The part of the gain that is related to depreciation, however, will be taxed at a maximum 25% rate as mentioned above . So your depre recapture is your accumulated depre taken(or whether or not you took) on your rental pty while you own and you must reapture when you dispose of th pty.Depre recap has nothing to do with the amount you paid for the property



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Old 02-15-2014, 08:05 AM
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Originally Posted by Wnhough View Post
#1;Whether or not you deducted your depre on the rental pty, the IRS still considers the home's basis reduced by the unclaimed annual depre. You have the same adjusted cost basis for selling your rental property whether you claim the depreciation deduction or skip it.If you forgot to take depreciation in a prior tax year, you must amend your tax return.

#2;correct.
#3;I guess you misunderstand the concept of depre recapture, sec 1250 rule, I mean,depre recap is a tax provision that allows the IRS to collect taxes when you dispose of your rental pty that you had previously used to offset taxable income. As you own rental property, you can use the depre of the property to offset taxable income. In doing so, you lower your basis in the property so that when the property is sold, your gain is computed based on the selling price minus your purchase price and all depreciation that you previously claimed. So when you dispoe of it, you need to calculate your depreciation recapture liability; depreciation recapture is taxed as ordinary income taxed at 25% aslongas your marginal tax rate is 25% or higher. Aslongas you forgot to take depreciation in a prior tax year, you must amend your tax return. Depre must be claimed in the year you are entitled to take it under federal law or you lose it In general, you are only allowed to file an amended return to correct your depreciation amount if you claimed the incorrect amount because of a math error made in any year; you claimed the incorrect amount because of a posting error made in any year; or you claimed the incorrect amount on property placed in service by you.


#4;No; as mentioned above, depre recapture can cause a significant tax impact for you who are selling residential rental property. Part of the gain will be taxed as a capital gain and may qualify for the maximum 15% rate on LTCG. The part of the gain that is related to depreciation, however, will be taxed at a maximum 25% rate as mentioned above . So your depre recapture is your accumulated depre taken(or whether or not you took) on your rental pty while you own and you must reapture when you dispose of th pty.Depre recap has nothing to do with the amount you paid for the property
Thank you for your reply.
I am still trying to comprehend how this works and have made the following calculation.
Will appreciate if you review it and let me know if I am on the right track.

DEPRECIATION DEDUCTION
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?

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

DEPRECIATION RECAPTURE
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.


Last edited by iafctax : 02-15-2014 at 10:54 AM.


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Old 02-15-2014, 08:49 PM
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Quote:
Originally Posted by iafctax View Post

#1;DEPRECIATION DEDUCTION
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

#3;DEPRECIATION RECAPTURE
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.

#1;correct;

#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%.


Last edited by Wnhough : 02-15-2014 at 10:21 PM.


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