Confused...Recapture Depreciation....Rental Property

[M7047]

This was part of another post that must be considered closed.

If client has home that they turned into rental property, used it 2 out of the 5 and then sold it, does he have to recapture the depreciation if the total gain is under 250,000?  In other words, if you reduce your basis by the amount of depreciation used and still have a gain, can you exclude it all if that gain was under 250,000??

Ex house value 150,000 used depreciation of 10,000 so basis is now 140,000. Sales price is 190,000 making a gain of 50,000.

Can they just exclude all that gain and not report anything?

 

https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc/property-basis-sale-of-home-etc-5

"Generally, the law allows an annual depreciation deduction on your rental property and you must reduce the basis of the property by the amount of your depreciation deductions. If you don't claim some or all of the depreciation deductions allowable under the law, you must still reduce the basis of the property by the amount allowable before determining your gain on the sale of the property.  

The gain attributable to the depreciation may be subject to the 25% unrecaptured Section 1250 gain tax rate. Additionally, taxable gain on the sale may be subject to a 3.8% Net Investment Income Tax. For more information, see Questions and Answers on the Net Investment Income Tax. Refer to Publication 523, Selling Your Home and Form 4797, Sales of Business Property for specifics on how to calculate and report the amount of gain."

[Lynn EA USTCP in Louisiana]

Yes , the depreciation is taxed

[M7047]

Why, when the whole gain is under 250,000?

Wouldn't you figure the gain/loss first and go from there . I mean, if you have to factor the depreciation into the basis aren't you already recapturing it...

 

[Lion EA]

You answered your own question with the link you quoted. The depreciation is taxed at a maximum of 25%, for as much of the depreciation as created a gain. Your other capital gain, in your case, is taxed at long-term capital gain. Follow the flow on the forms to see how it works in your case.

[kathyc2]

1 hour ago, M7047 said:

Why, when the whole gain is under 250,000?

Wouldn't you figure the gain/loss first and go from there . I mean, if you have to factor the depreciation into the basis aren't you already recapturing it...

 

Because the 10K was used as an ordinary rate tax deduction in the year(s) it was a rental.  Because the house appreciated rather than depreciated, that 10K needs to be put back in as taxable income at ordinary rates (up to a max 25%). 

[Terry D EA]

The responses you have received are correct. I just completed one of these scenarios. Below is an example from the Journal of Accountancy.

Disallowance for use as a nonresidence. If a taxpayer also uses a home for purposes other than as a principal residence, the gain exclusion does not apply to the extent of depreciation taken on the home after May 6, 1997.

Example. On January 1, 1998, Kelly bought a home and rented it to tenants for two years. During the rental period, Kelly takes depreciation deductions of $14,000. On January 1, 2000, Kelly moves into the home and begins to use it as a principal residence. On February 1, 2002, after owning and using the home as a principal residence for more than two years, he sells the home at a $40,000 gain. Only $26,000 ($40,000 realized gain minus $14,000 depreciation) of the gain is eligible for the exclusion. Kelly must recognize the remaining $14,000. For purposes of IRC section 1(h), the gain is an unrecaptured IRC section 1250 gain.

Make sure you report the depreciation gain using form 8949. When a rental asset is sold it is normally reported on form 4797. However, none of the gain will be excluded.