@df1976 wrote:
Q1. Does depreciation recapture put you in a higher tax bracket
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?
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.
1) Yes, but only the 'extra' income is taxed at 22%. The prior income is still at the 10% and 12% brackets.
2) Sort of. The calculation is more based on the amount of foreign tax, not the specific amount of US tax on those specific items. The software should do the calculations, via Form 1116.
3) First, the Basis for depreciation is the LOWER of (a) Cost and (b) Fair Market Value when it was turned into a rental. With that in mind, is the depreciable Basis incorrect?
If so, correct the Basis in the program now. However, you need to change the "prior depreciation" to the amount that SHOULD have been claimed (the larger amount).
So the correct Basis will be used to report the sale of the property. But unfortunately, there will be tax due to the gain from depreciation, even the depreciation that they mistakenly did not take.
4) If there was a mortgage on the foreign rental property, there could be Section 988 gains or losses, and I really doubt if TurboTax deals with that. Many tax professionals don't even know how it works.
Due to the many issues you are asking about, I really think it will be in your best interest to go to a good tax professional that is experienced with such things.
