Rental Property Sale - Depreciation Recapture (sales, price, advantage, state)

[MPRetired]

I'm planning to sell a rental property next year and am planning the tax implications of the sale. Do my assumptions and interpretations of the tax code sound correct?

1. My adjusted basis in the house = (My purchase price + closing costs/selling expenses + capital improvements) - (My accumulated depreciation)?

2. The house has three years of MACRS depreciation on the 27.5 year model. Since there was no accelerated depreciation, there will be no need to count this accumulated depreciation as income (since it is being subtracted from my basis anyway to arrived at the overall capital gain/loss)?

3. LT Capital Gain = Sales price - my basis in the house. It is that simple, yes?

[old_cold]

Simplified, yes. What wasn't taxed earlier ( depreciation) now becomes taxable.
(I shouldn't reply before a second coffee in the morning ...let's see if I've embarrassed myself)

[mathjak107]

the recapture is limited to 25% tax rates regardless what it was written off at

[thelopez2]

I interpret it differently. You recapture whether or not it is accelerated depreciation.

You made capital improvements which have been depreciated over time. You also get to recapture the remaining expense that you were carrying forward. The capital improvements may offset the depreciation.

I'm not a tax professional I hope one confirms if I'm right or wrong.

[MPRetired]

I used to think the same thing, until reading the last paragraph on page 55 of this IRS publication:

http://www.irs.gov/pub/irs-pdf/p946.pdf

Then jump over to IRS pub. 544 and read about section 1250 property on page 30:

http://www.irs.gov/pub/irs-pdf/p544.pdf

And it reads that if you are depreciating by MACRS (straight line), you do not have any 'additional' depreciation and are not subject to any depreciation recapture.

So as I understand it, the only factor your accumulated depreciation has is when determining your adjusted basis, or how much CG you will realize at the time of sale, which could potentially be nothing.

[oregonwoodsmoke]

The internet is not the best place to get tax advice, but my understanding is that capital gains are taxed at the capital gain rate and the recaptured depreciation is taxed at your normal tax rate, which might be high, after you add in the capital gains from the sale of real estate to the rest of your income.

I've never recaptured depreciation. I just keep on doing 1031's, so I don't have any real life experience with the process. I suggest a good qualified tax specialist accountant.

[mathjak107]

Recapture is maxed at 25%

[MPRetired]

Any recent relevant experience selling a home with recaptured depreciation (using MACRS)?

[MorrisChick]

Residential Rental Property is depreciated over 27.5 years using Straight Line depreciation, Mid Month convention. At the time of sale, you must recapture all allowed or allowable depreciation that was to be taken during the ownership of the rental property. That 'allowed or allowable' can be read as MUST be taken whether you took it during the course of ownership or not. If the correct amount of depreciation was not taken, you can either amend the last 3 years of your tax returns or if need be use FORM 3115 to request the change in method of accounting to be able to take advantage of the depreciation that you did not take in the past. However, you will be required to recapture that amount during the year of sale.

I am a tax professional, but please do yourself a favor and call yours before you get into trouble.

[DMenscha]

Originally Posted by MorrisChick

I am a tax professional, but please do yourself a favor and call yours before you get into trouble.

Number one answer!