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DEPRECIATION RECAPTURE AND RELATIONSHIP WITH CAPITAL GAINS

dgentil3
Level 2

THE FOLLOWING IS AN EXAMPLE IN WHICH I WOULD APPRECIATE INPUT:

SUSAN AND JOHN BOUGHT A HOME IN 2000 FOR $200,000 AND LIVED IN IT FOR 10 YEARS AS THEIR PRINCIPAL RESIDENCE. IN 2010, THEY HAD TO MOVE TO FLORIDA FOR JOB-RELATED REASONS. THEY WERE UNABLE TO SELL THEIR HOME DUE TO RELATIVELY BAD MARKET CONDITIONS SO THEY DECIDED TO RENT IT. BECAUSE OF CAPITAL IMPROVEMENTS THEY HAD MADE WHILE THEY LIVED IN IT, THE CURRENT MARKET VALUE IN 2010 WAS $250,000. THEY BEGAN DEPRECIATION OF THEIR HOME BASIS IN 2010 AT $250,000.

10 YEARS LATER IN 2020, THEY SOLD THEIR RENTAL HOME FOR $300,000 WHILE STILL LIVING IN FLORIDA. DISREGARDING NOT DOING THE DEPRECIATION ACCURATELY, THEY HAD DEPRECIATED $80,000 WHICH NEEDS TO BE RECAPYURED ONTO THEIR 2020 TAX RETURN.

THE BASIS NEEDS TO BE REDUCED $250,000 MINUS $80,000 = $170,000 (NEW BASIS).

THIS MAKES THE CAPITAL GAINS TO BE $300,000 MINUS $170,000 = $130,000

RECAPTURED DEPRECIATION IS TAXED AT 25 PERCENT (0.25 X $80,000 = $20,000)

CAPITAL GAINS TAX FOR MOST MIDDLE-CLASS COUPLE INCOME IS 15 PERCENT. DOES THIS MEAN THAT THE CAPITAL GAINS OF $130,000 IS TAXED AT 15 PERCENT = $19,500 TAX DUE?

IF THIS IS CORRECT, THEN THE RECAPTURED DEPRECIATION IS FIRST TAXED AT 25 PERCENT AND THEN TAXED AGAIN WITHIN THE CAPITAL GAINS AT 15 PERCENT. THIS DOUBLE TAXATION OF THE AMOUNT OF RECAPTURED DEPRECIATION DOES NOT SEEM CORRECT. PLEASE ADVISE.

ONE FINAL NOTE WHICH IS NOT INCLUDED WITH THIS EXAMPLE IS THAT $20,000 OF QUALIFIED CAPITAL IMPROVEMENTS OVER THE 10 YEARS OF RENTAL COULD BE ADDED TO THE $170,000 BASIS MAKING THE FINAL BASIS $190,000.

PLEASE ADVISE IF ANYONE KNOWS OF ANY BOOKS OR OTHER DOCUMENTS AVAILABLE WHICH SHOWS EXAMPLES OF FILLED OUT IRS FORMS FOR THE SALE OF RESIDENTIAL RENTAL PROPERTY. EXPLANATIONS INCLUDED WOULD ALSO BE GREAT. THANK YOU

 

 

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5 Replies 5
Terry53029
Level 12
Level 12

Suggest you start with Pub 551. https://www.irs.gov/publications/p551

dgentil3
Level 2

Thank you!

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TaxGuyBill
Level 15

We could guide you better if you tell us what software are you using.

It will also help us if you tell us if you a tax professional, if are you doing your own tax return or if you doing homework?

dgentil3
Level 2

TURBOTAX PREMIER.

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abctax55
Level 15

@dgentil3 

So, to answer Bill's question, you are doing your own return...

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Cheers!

 

Former Chump..oops..AllStar...I used to be a people person, then people ruined it


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