Asset recapture

[jonpagel]

Sold a rental last year for a profit…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

[Carl]

When you sell at a gain, you are required to recapture all depreciation taken and pay taxes on that recaptured depreciation at the "ordinary" income tax rate. Since you sold at a gain, you need to show a gain on each asset listed. The only way to do that, is to make your sales price of each asset "at least" $1 over the original cost basis.  So it doesn't matter if you show a $1 gain on some assets, and a $100,000 gain on other assets. A gain is a gain. That is the only way depreciation will be correctly recaptured and taxed.

If you show a gain on some assets and a loss on others, then the depreciation will not be recaptured and taxed correctly on those assets you show a loss on. Instead, that depreciation will be included in the capital gains and incorrectly taxed at the capital gains tax rate.

I've run that scenario through the program and confirmed what happens when you don't report a gain on all assets.

[jonpagel]

Ok that makes sense on how to enter it assuming every asset you have ever had has to have the depreciation recaptured….but people talk about putting the FMV value of the items as the selling price or zero for old appliances that aren’t worth anything….I guess the bottom question is if the IRS expects to recapture all the depreciation you have ever taken on all assets on your list regardless of their current status or condition….your method would recapture all that depreciation but I am still unsure if I need to report a gain on say a 8 year old appliance…sigh….thanks 

[Carl]

Ok that makes sense on how to enter it assuming every asset you have ever had has to have the depreciation recaptured….

That's only if you sell at a gain.Say you've got a washing machine that's 3 years into it's 5 years of depreciation and it breaks. You have to buy a new one. For the two years remaining depreciation on the broken washer, it's deductible and becomes a permanent deduction since it obviously can't be sold at a gain or a loss. There's several ways to handle it in TTX. One way, is to report it sold for $0. If you're not selling all of the assets in the same year, the remaining depreciation is considered a loss. Depending on the numbers for that tax year, the remaining depreciation would be included in the PAL carry over losses.

but people talk about putting the FMV value of the items as the selling price or zero for old appliances that aren’t worth anything….

When you use the original cost basis as the selling price, then all of the depreciation is still recaptured and taxed at the ordinary income tax rate.

I guess the bottom question is if the IRS expects to recapture all the depreciation you have ever taken on all assets on your list regardless of their current status or condition…

It's not a guess. The IRS requires you to recapture all depreciation taken on an asset when sold at a gain. Due to programming limitations in the TTX program, when you sell the property at a gain you "will" pay tax on that depreciation taken on all assets one way or another - either correctly at the ordinary income tax rate, or incorrectly at the capital gains tax rate.

.your method would recapture all that depreciation but I am still unsure if I need to report a gain on say a 8 year old appliance

if you sell the property at a gain, you sell "all" of it it a gain. Likewise, if you sell the property at a loss, you sell "all" of it at a loss. I agree it seems counter-intuitive to sell a year's old appliance at more than you paid for it. But on the other side of that coin, it is not at all weird to sell a 20 year old structure for more than you paid for it. Heck, the structure the appliance is in, is older than the appliance. Think that one through. 🙂

[jonpagel]

Ok so every asset do the original cost plus $1 and enter that as the selling price for each item, add those up and subtract from the sale price and that number goes in the sale price for house ….the selling expenses I can just group under the main house I assume I don’t have to allocate to each one….example

sale price of house- $100000

Appliance purchased for $1000 report at $1001

new sewer line with an original cost of $10000 report as $10001

then the house instead of $100000 I would report it as $88998.

I have maybe 15 assets but the above example is correct?  All my assets are fully depreciated so that would basically tax every dollar I ever spent and then depreciated at ordinary income rate of 25% in my case…

What about say a roof that you are only a couple

years into?  If you do cost plus one you are saying you depreciated the whole thing when in fact you only got a couple years of depreciation credit?

thanks

[Carl]

the selling expenses I can just group under the main house I assume I don’t have to allocate to each one

You can allocate if you want. But overall, you're correct. So long as you still show a gain after subtracting the selling expenses from the selling price, you'll be fine.

I'll usually allocate my selling expenses between the structure and the land.  So if I have a selling price for the property that is 70% structure and 30% land, I'll allocate the selling expenses similarly. I'll make slight changes if necessary so I don't end up showing a gain on the structure and a loss on the land.

Since I've accounted for all my selling expenses to be deducted, on the main property asset, I don't bother allocating them to other assets unless I really need to.