Re: Depreciation Recapture
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Level 2

Depreciation Recapture

Bought our house in 1995 and rented it until 2000.  Then stopped renting it, demolished most of it and renovated it.  Used it as our vacation home, never principal residence.  During the rental period, we did depreciate the old house.  Now that we are selling the renovated house, do we have to recapture the depreciation back 20 - 25 years ago when we sell the house? 

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Employee Tax Expert

Depreciation Recapture

Yes, depreciation recapture takes place even on converted property.

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Level 15

Depreciation Recapture

Sec. 280B provides that “in the case of the demolition of any structure . . . any amount expended for such demolition, or . . . any loss sustained on account of such demolition . . . shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located.” Regs. Sec. 1.280B-1(b) further explains that the term “structure” is a building, including its structural components, as defined in Regs. Sec. 1.48-1(e). .

For situations where only parts of a building structure are demolished, the IRS has provided a safe harbor for purposes of determining whether structural modifications to a building are considered a demolition (see Rev. Proc. 95-27). The safe harbor indicates that modifications will not be treated as a demolition for purposes of Sec. 280B if: (1) 75% or more of the existing external walls of the building are retained in place as internal or external walls; and (2) 75% or more of the existing internal structural framework of the building remains in place.

 

 

it would seem that you do not meet the safe harbor limits.   therefore, I believe that the net depreciated cost of the part demolished gets gets added to the land including demolition costs.    costs of renovating get added to cost basis of the building

 

some research I did has indicated that three is no depreciation recapture on the part that was demolished.  however,  if would seem that depreciation recapture would apply to the portion renovated  

 

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Level 2

Depreciation Recapture

Thanks for the info.  Appreciate it !.  Total depreciation was about $30 K for the rental period.   Just started working on the taxes and it appears we should enter the amount of depreciation from 1995 to 2000 ($30 K) "Decrease to Basis, Adjusted Basis of Home Sale Worksheet", line 10 - to decrease basis.  Then enter amount from May 1997 to 2000 for recapture exclusion ($30 K- 8 K for earlier years =$22 K) Part IV Exclusion, line 30 on "Home Sale Worksheet".   Since entire house was rented and renovated, probably doesn't make sense to try and separate.  Do my assumptions on what and where to enter the data seem about right?  Thanks in advance.

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Expert Alumni

Depreciation Recapture

 

Yes, you would enter the Depreciation Allowed for the rental period 1995-2000 on Line10 of the Home Adjusted Basis Worksheet. 

 

To decrease Capital Gain you realize from the rental home sale, make sure to also increase the basis you originally used by the amount of renovation you did.

 

For example, if you used a basis of 100K when you first set up the home as Rental Property, and you did 50K worth of renovations to it prior to the sale, you would want the new basis for the sale to be 150K. 

 

Not sure what your time period of May 1997-2000 represents, but if the house was considered a rental from 1995-2000, then enter the full amount of Depreciation for that period. 

 

Click the link for more info on info on Sale of Rental Property

 

 

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Level 15

Depreciation Recapture

The transfer of unclaimed depreciation to the land value does not apply here, because the property was not lost to casualty or fire, and business use of the property did not occur after the demolition/renovation. So you don't get to claim or deduct in any way, the depreciation that remained to be taken after you stopped using the property as a rental.

But your cost of renovation including the cost of demolition, (not the value of what was demolished) is added to the cost basis of the structure. You do not get a reduction in cost basis for what was demolished because it was not a loss due to casualty or fire. You destroyed it by your choice.

The cost/value of the land does not change for any reason.

All depreciation taken on the property during your period of ownership must be recaptured in the tax year you sell the property, and that recaptured depreciation will be taxed in the year of the sale.

If you qualify for the "2 of last 5" rule (and it appears you do not) then the recaptured depreciation is *not* included in that exemption. The recaptured depreciation is taxed no matter what.

 

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Level 2

Depreciation Recapture

Marilyn,  Thanks for the info.  I asked about the period from May 1997 to 2000 because there is an exclusion recapture shown on the second sheet, Part IV Exclusion, line 30 on "Home Sale Worksheet".  I recall there was something about the period after May 1997 being taxed at a different rate or something.  So that is why I entered the portion of depreciation from that period here.  If I look at the 1250 sheet, it shows any depreciation reported under this exclusion is offset by any long term loss carryover or short term loss.  Is that correct? 

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Expert Alumni

Depreciation Recapture

You are correct.  The following quotations are from an Intuit ProConnect help website: Reporting Depreciation on Sale of Your Home Worksheet

 

"If the property was not linked to an Asset Entry Worksheet go to the Home Sale Worksheet Part IV - Exclusion and Taxable Gain, and enter the amount of depreciation for periods after 5/6/1997. Enter any depreciation allowed or allowable as a deduction for periods after May 6, 1997.  This portion of the gain cannot be excluded

 

According to IRS Publication 523, the depreciation recapture (depreciation taken after May 6, 1997) is only reported if there is a gain on the sale. The depreciation recapture is reported on Form 8949 and Schedule D but not Form 4797.

 

@bobp1426

 
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