Yes, you will need to allocate the net sales proceeds to
all the assets sold under your rental sales transaction.
The allocation of the sales proceeds to
the rental property and the rental assets is done on a percentage of cost
basis.
So if
sales proceeds are $100,000 with $20,000 allocated to land and $80,000
allocated to the building structures, you will further allocate this total for
the rental structures to each structure (rental house plus capital
improvements) based on each assets original cost over the total of all original
costs for these assets.
If the
original cost basis of the rental house was $40,000, the carpet was $5,000
and the roof was $10,000. Then the allocation of the $80,000 of sales proceeds
would be: rental house - $58,182 (40,000/55,000 * 80,000), carpet-
$7,273 (5,000/55,000 * 80,000) and roof - $14,545 (10,000/55,000 * 80,000).
Additionally, when you sell your property, you must pay 25
percent recapture tax (also referred to as Section 1250 recapture) as well as
regular state income tax on the depreciation you claimed. (Remember the IRS
will assume that you claimed the correct amount of depreciation every year—this is
true regardless of whether you actually claimed any depreciation on your tax
return).
Click
for more information about depreciation on rental
property
