Q1. Does depreciation recapture put you in a higher tax bracket? For example:
A married couple filing jointly has taxable income total (from wages and rental income) of $80,000, which puts them in a 12% tax bracket. They sell a rental property. The depreciation recapture on the sale is $20,000. Are they paying 12% on the $20,000 or do they get bumped to the 22% tax bracket, which results in paying taxes according to the 22% bracket on ALL of their income (wages, rental income, and depreciation recapture)?
Q2. Can you use foreign tax credit on depreciation recapture? For example:
A married couple filing jointly sells a rental property abroad. The depreciation recapture on the sale is $20,000 taxable at 12% = $2400. The capital gain (long term) is $100,000 taxable at 15% = $15,000. They paid $20,000 in taxes on this sale in the country where the property was located. They can claim $15,000 of Foreign Tax Credit on the long term capital gain tax, but can they claim another $2400 from the remaining $5000 on depreciation recapture?
Q3. Can you correct the cost basis at the time of sale if it was wrong on Form 4562? For example:
A married couple filing jointly has been taking depreciation on their rental property annually based on $200,000 cost basis in Form 4562. It now turned out that the actual cost basis was $350,000 (due to lack of documentation at the time of purchase) + $50,000 land value, so $400,000 total. They're planning on selling the property in the next couple of years. Even though it's a bummer they've been taking less depreciation than they could have, will they be able to use $400,000 purchase value to calculate their depreciation recapture and capital gain/loss? Is it wrong to continue using the same incorrect depreciation in the next 2 years for the ease of filing? Is there any requirement to correct Form 4562 if the cost basis turns out to be incorrect down the line?
Thank you!
