Allocating rental sales price in TT

[jonpagel]

So I have a rental house I sold for a gain…..the house itself is handled by TT fine with it recapturing the depreciation I took….here are the questions….

I took the special allowance on most items……

*appliance that has fully depreciated its 5 year life I feel should get a $0 sales price

*I have a couple items like this…..a complete sewer re lining that was done 4 years ago….I choose to take the 100% allowance of the around $10000 cost in that year..…TT assigned it as a land improvement and a 15 year life ….so what sales price does something like that get?  They want to recapture all depreciation that was taken or what is unused?…if the full $10000 I would assign a price of $10001?  If just what I took but didn’t keep long enough to go the whole 15 years I would divide $10000 by 15 years and list the sales price as the 8 years of depreciation left?  Thanks

[GeorgeM777]

For the sewer lining it appears you have already recovered it cost, so its adjusted cost basis would be zero.  The same would be true for the appliance.  Regarding allocating the sale proceeds, if the sewer lining represented 5% of the buildings value at the time you purchased this asset, then allocate 5% of the proceeds to this asset.  The same process can be applied to all the other assets.

Perhaps the easiest way to allocate your sale proceeds is to allocate an amount of the proceeds to each asset based on that asset's reasonable value.  Then you compare those reasonable values to the adjusted cost basis for each asset to determine whether you have a gain or loss on the asset.   Allocate the remaining sales proceeds between the land and the building unless this would be unrealistic for the land and building values.  

@jonpagel

[jonpagel]

So for an appliance still in use but maybe 8 years old that is fully depreciated what does the IRS want?  If it was $1000 brand new and it has depreciated fully the adjusted cost basis is $0….since it is old and fully depreciated I can put $0 for the sales allocation which wouldn’t recapture any depreciation I took or I can put $1001 which would essentially have all the depreciation I took taxed at 25%(in my case ordinary gains)….is that what they expect me to do?  Have every penny of depreciation I took on all the items subject to 25% instead of just long term capital gains?  Thanks

[ThomasM125]

You can assign a sales amount to the furniture and equipment equal to the fair market value as opposed to the orginal cost. You don't have to report a gain on sale of something that is basically worthless, as in your example with the appliances.

The maximum tax on the gain from depreciation recapture would be 25%, but it could be lower than that if your marginal income tax rate was less than that. 

[jonpagel]

Ok but if you assign $0 to the sales price then it is neither a gain or loss and the IRS doesn’t get that depreciation I took on it years ago back….is that ok or do they expect every penny you ever depreciated to be taxed at the 25%(for me) versus the 20%(for me capital gains)….if they do then I would put purchase price plus $1 and then that would capture all that depreciation but I don’t want to do that unless I have to or am supposed to thanks

[DianeW777]

Yes, you are correct and no the IRS doesn't expect every penny of depreciation to be recaptured unless your gain on the sale exceeds that expense.  The gain on a sale, to the extent of the depreciation expense, is used to recapture depreciation, and only to the extent of that gain on the sale. It's quite common to enter zero sales price for such things as appliances that have outlived their life. However, the sewer is an example of something that would still have a value. You don't need to be concerned about all of the depreciation expense you may have used during the life of the assets.  

Use the original cost or fair market value (FMV) of each asset listed on depreciation, add those together then divide each one by the combined total to find the percentage of the cost for each asset.  Use that percentage times the sales price and sales expenses to find the selling price/sales expenses for each asset. (Choices would also be fair market value on the date of the sale or adjusted basis on the date of the sale, which is cost less depreciation.)

Example:  Original Cost or FMV (of each asset on your depreciation schedule)  As noted your appliances would be zero with a zero selling price

$10,000 Land                = 13.33% 

$50,000 House              = 66.67%

$15,000 Improvements  = 20%

$75,000 Total                 = 100%

Multiply each percentage times the sales price/sales expenses to arrive at each individual sales price/sales expense.

I hope this example provides clarification to enter your sale. If you have not used TurboTax, enter each asset exactly as it appears on your prior year return.

[jonpagel]

Ok thanks….couple questions…what about an appliance that is only 3 years old and is on a 5 year schedule?

the house was purchased in 2007 and the sewer was only 4 years ago….other improvements where at different times but the timeline doesn’t matter as much, just add up the original costs and split it up like you have in your example?

you mention adjusted basis on date of sale…the bulk of my assets are fully depreciated and many had the special allowance taken in the year they were put in service, all of which have an adjusted basis of zero….but then I would put zero for each sales price which doesn’t seem right?  I had a overall gain on the sale

thanks

[DianeW777]

An appliance that is only three years old may have a value but it would be minimal.  You could google a value and then decide an amount for your appliance.

Yes, you can use my example.  As a rule real estate only appreciates, rarely does it go down in value so original cost would be reasonable.

I suggest you use my example for other assets that are not sewer or building or land.  Find a FMV that is reasonable for those assets then do your proration to arrive at the selling price for each asset.  The key is that you do not want to exaggerate the value of any asset that has a lower FMV because the gain on the land and building will have the most favorable tax treatment for you, as it should. 

You are taking strides to arrive at the most reasonable way to handle the sale. Keep all of your backup information on how you arrived at the values with your tax records.  This will be all you need if you should ever be questioned.

@jonpagel