Deductions & credits

What part of the depreciation and amortization report is used when the property is sold

Nearly all of it. I'm assuming this is rental property.

It's important to understand the difference between capitalized costs and amortized costs.

- Cost associated with acquisition of the property when you originally purchased it are added to the cost basis of the property. An example would be the transfer fees (sometimes called documentary stamps) that are paid at the courthouse to remove the seller's name from the deed and replace it with the buyer's name. That means they get capitalized and depreciated over time as "a part of" the property cost basis.

 - Cost associated with acquisition of the loan.  Examples would include loan application fees and survey fees if the lender required a survey as a condition of the loan. These costs are amortized and deducted over the life of the loan.

- Depreciation is *not* a permanent deduction. When you sell the asset, all depreciation must be recaptured in the tax year of the sale. Recaptured depreciation does two things.

   a. It is added to your AGI in the tax year of recapture and has the potential to bump you into the next higher tax bracket. It just depends on the numbers.

   b. Recaptured depreciation is taxed at the "ordinary" income tax rate up to a set maximum of 25%.

 Depreciation and amortized costs are handled differently from each other in the tax year of the sale.

- Amortized costs "are" a permanent deduction. If there is any remaining amount to be deducted in the tax year of the sale, that remaining amount is fully deductible in the tax year of the sale.

 - Capitalized/depreciated costs are not a permanent deduction. They get recaptured and taxed (as stated above) in the tax year of the sale.

Below are two sets of guidance. The first is how to report the sale of rental property in the SCH E section of the program so that all recaptured depreciation is taxed correctly at the ordinary tax rate, and not the capital gains tax rate. The 2nd set tells you how to deal with any remaining amortized costs you may have, so they are correctly deducted.

Reporting the Sale of Rental Property

If you qualify for the "lived in 2 of last 5 years" capital gains exclusion, then when prompted you WILL indicate that this sale DOES INCLUDE the sale of your main home. For AD MIL personnel who don't qualify because of PCS orders, select this option anyway, because you "MIGHT" qualify for at last a partial exclusion.

Start working through Rental & Royalty Income (SCH E) "AS IF" you did not sell the property. One of the screens near the start will have a selection on it for "I sold or otherwise disposed of this property in  2021". Select it. After you select the "I sold or otherwise disposed of this property in 2021" you continue working it through "as if" you still own it. When you come to the summary screen you will enter all of your rental income and expenses, even if it's zero. Then you MUST work through the "Sale of Property/Depreciation" section. You must work through each individual asset one at a time to report its disposition (in your case, all your rental assets were sold).

Understand that if more than the property itself is listed in your assets list, then you need to allocate your sales price across all of your assets.  You will only allocate the structure sales price; you will NOT allocate the land sales price, since the land is not a depreciable asset.  Then if you sold this rental at a gain, you must show a gain on all assets, even if that gain is $1 on some assets. Likewise, if you sold at a loss then you must show a loss on all assets, even if that loss is $1 on some assets.

Basically, when working through an asset you select the option for "I stopped using this asset in 2021" and go from there. Note that you MUST do this for EACH AND EVERY asset listed.

When you finish working through everything listed in the assets section, if you ever at any time you owned this rental you claimed vehicle expenses, then you must also work through the vehicle section and show the disposition of the vehicle. Most likely, your vehicle disposition will be "removed for personal use", as I seriously doubt you sold your vehicle as a part of this rental sale.

DEDUCT FINANCING FEES OF OLD LOAN WHEN REFINANCING OR SELLING

In the Assets/Depreciation section for that rental property, elect to edit/update the entry for your points.

- On the "Review Information" screen click Continue.

- On the "Did you stop using this asset 2021?" screen, click YES.

- On the "Disposition Information" screen, in the disposition date box enter the date you closed on the new loan. Then click Continue.

 - On the "Special Handling Required?" screen, click YES.

- On the "Depreciation Deduction Amount" screen, select Transfer These Fees For Me To Other Expenses. Then click Continue.

You'll see the remaining fees of the old loan to be deducted in the Rental Expenses section, very last screen of that section. The entry will start with "Unrealized Refinancing Fees...."