Appliance & Furniture Assets-how to designate "Sale Price"

[dwpcep]

We sold a rental home in May of 2021.   During the time we were renting the property we replaced a washer, dryer & dishwasher.   Each of these improvements are listed separately on the asset /depreciation screen.   When I enter to dispose of the items, it asks for sales price and sales expense.   The selling price of the home includes these items, so I am confused as to how to list a "sales price".   Can I leave this blank?

[Carl]

The selling price of the home includes these items, so I am confused as to how to list a "sales price". Can I leave this blank?

If you leave them blank, then all recaptured depreciation will be taxed at the capital gains rate, instead of the "ordinary income" tax rate.

What you need to do is allocate some of your structure sales price, to those assets. Allocate enough from the structure sales price, to the other assets so that the sales price of those assets is "at least" $1 more than the cost basis of those assets. That way, recaptured depreciation will be correctly taxed at the lower ordinary income tax rates.

Note that since land is not a depreciable asset, you will not allocate any of the land sales price, to any other depreciable asset.

[dwpcep]

So...if my structure sales price is 100K, the original cost of the appliances was $4K,  I would need to deduct $4001K from my structure sales price?   Would I them leave the selling expenses for the appliances blank?

[Carl]

I would need to deduct $4001K from my structure sales price?

yes, you've got it.

Would I them leave the selling expenses for the appliances blank?

yes, you can leave those blank. You only need to spread your sales expenses across the land and the structure. Your sales expenses on an asset, are subtracted from your gain on that asset. So with a $1 gain on the appliance, if you allocate any sales expense to that asset, you'll have a loss on that asset. That will skew the depreciation recapture then. Showing a loss on some assets and a gain on others will tend to skew things a bit. I don't know if such a "skew" would attract unwanted attention from the IRS or not. So it's best to avoid it.

The important thing is to have depreciation correctly recaptured. If you show a loss on on asset, then some to none of that depreciation will be recaptured and taxed as ordinary income. Instead, it gets included in your gain and taxed at the capital gain tax rate.

For most, there's not that much difference in the tax liability between the two tax rates. But depending on your gain and your overall AGI, it can have at least quite a noticeable impact.

[dwpcep]

Ok, thank you that makes sense.   I have a few other questions...

We replaced the flooring just prior to the sale of this property.   I understand that expense can be added to the basis.   Can you break down how I list that improvement on the asset/depreciation screen?  

Also, this pertains to the actual structure sale of the rental home.   Is this correct?  (see below)

Asset sales price=sales price less land assessed value less  value of other prior depreciated assets + $1

Asset sales expenses=closing costs

Land Sales Price=land assessed value

Land Sales Expense=   I have left this blank as all the closing expenses are listed above in Asset Sales Exp

I appreciate your help!

[Carl]

We replaced the flooring just prior to the sale of this property. I understand that expense can be added to the basis. Can you break down how I list that improvement on the asset/depreciation screen?

There's two ways to do it, and I recommend the first way because it's less likely to raise flags. I don't know if the 2nd way will raise flags or not. But it would be no surprise if it did.

1. Enter the asset in the assets/depreciation section (Called Sale of Assets/Depreciation if you've already indicated prior that you sold the property) classify it as residential rental real estate and give it an in service date of the closing date of the sale. At most, 15 days of depreciation will be taken and if so, it will be so negligible that it just won't matter.

2. Enter the asset and classify it as "residential Rental Real Estate" with an in service date of your closing date on the sale. Then enter the same value (your cost) in both the COST and COST OF LAND box. While technically that's wrong (probably wrong legally too) it will ensure that not a single penny of depreciation is taken on the asset. Besides, since the asset was never placed "in service" per-se, there should not be any depreciation taken anyway.

Is this correct?  (see below)

Asset sales price=sales price less land assessed value less  value of other prior depreciated assets + $1

Asset sales expenses=closing costs

Land Sales Price=land assessed value

Land Sales Expense=   I have left this blank as all the closing expenses are listed above in Asset Sales Exp

I can't tell if we're on the same page or not. So here's my take on it.

Overall sales price $200,000 with $5000 in sales expenses.

Original purchase price was $100,000 and when I set this up years ago, I allocated $30,000 to the land with the remaining $70,000 allocated to the structure.

Later, I paid $5000 for a new HVAC, and $10,000 for a new roof.

That makes my total cost basis in the property $115,000 but it does "NOT" change my allocations. I still have $30,000 of that cost basis allocated to the land, which is not depreciated, and  the remaining $85,000 allocated to the structure and other depreciated assets.

Now, since  30% of my cost basis is allocated to the land, I'm going to allocate 30% of my sales price to the land, and 70% to the structure and other assets.

LAND sales price - $60,000 (this amount is more than your "cost of land" amount since you sold at a gain.)

I'm also going to allocate 30% of my sales expenses to the land, with the remaining 70% to the structure.

LAND Sales expenses - $1,500

With the above numbers, I show a $28,500 gain on the land. So far, so good.

What I have left is $155,000 to allocate between the structure, roof and HVAC. So now I'm going to pick numbers "out of thin air" to assign as the sales price to the structure and remaining assets, ensuring that I show "at least" a $1 or more gain on each asset, after subtracting the remaining $3,500 in sales expenses. Also, to make it easier, I'm just going to assign those remaining sales expenses to the structure only, and nothing to the remaining assets.

Structure sales price $120,000

Structure sales expenses $3,500

Doing the math, I show a $46,500 gain on the structure after subtracting the remaining sales expenses. I've accounted for $180,000 of my sales price thus far.

ROOF sales price, $12500.

ROOF sales expenses $0 (Already used up my sales expenses between land and structure)

Doing the math, I show a $2,500 gain on the roof. All good, and I still have $7,500 of sales price to "use up". So lets allocate that to the HVAC

HVAC sales price $7,500

HVAC sales excpenses $0 (already used up sales expenses on land and structure)

Doing the math, we show a $2,500 gain on the HVAC. We're good and all is done. Now to check it, lets add up the sales price of everything.

LAND - $60,000

STRUCTURE - $120,000

ROOF - $12,500

HVAC - $7,500

TOTAL -

TOTAL SALES PRICE adds up to $200,000, which is what you sold the property for.  I show a gain on all assets. Therefore all depreciation on each asset is recaptured correctly and taxed at the "ordinary income" tax rate, and not the capital gains tax rate.

[dwpcep]

So, choosing #1, when I get to the screen that asks for the asset sales price, do I also deduct the cost of the flooring?    Do I list the sales price of the flooring +$1?    You mentioned doing it this way, I would get 15 days of depreciation, but that didn't happen.   

[Carl]

So, choosing #1, when I get to the screen that asks for the asset sales price, do I also deduct the cost of the flooring?

Not exactly sure I'm following you here. But I think I am. Basically, after you've entered a sales price for all assets, when you add up those sales prices, they should total up to your contracted sales price in your sales contract. Not a penny more. Not a penny less.

Do I list the sales price of the flooring +$1?

You can do it that way. The sales price of the flooring and any other assets must be "AT LEAST" $1 more than the cost basis of that asset.

You mentioned doing it this way, I would get 15 days of depreciation, but that didn't happen.

It's possible you could. Doesn't mean you will. Since you placed it in service on the closing date of your sale, that's a good thing that it did not figure any depreciation.

[dwpcep]

Ok, so with the flooring adding to the basis, my gain is less, so my tax due is less.    In looking at the forms...I just want to make sure that my depreciation has been recaptured.    Can you tell me  where to look?

The Disposition Report shows the gross sales price of the property(adding all improvements).  So that looks good.    The Asset Entry Worksheets for the appliances purchased in prior years, lists ordinary income from depreciation recapture, but on the Asset Entry Worksheet for the actual structure is only shows the Cap Gain, not anything for depreciation recapture.   There is an unrecaptured gain of which part is being taxed at 0%(jt income under 80K) and another that is being taxed at 15%.

Thank you for your help and please pardon my lack of expertise.   This is the 1st rental we have owned/sold.

[JulieS · Accepted solution]

The easiest way to view your depreciation is to look at your Form 4797. Most of your assets will be listed in Part III and the amount of depreciation is listed on line 22 for each asset. 

Depending on exactly what you have listed as assets, you may have some assets listed in Part I. The amount of depreciation is listed in column 2e. 

The land may appear in Part II, but land is not depreciable, so there won't be a depreciation entry there.