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Level 3

How to calculate undepreciated improvements at sell?

I put new carpet in a rental in 2018. I'm thinking to include as an asset in TT (extended return) so it would depreciate because I already running a loss for that property. I ended up selling that property for a gain in 2019. So, I was thinking to carry over the remaining depreciation to use against my capitol gains. Since I am working with an extended return, I figure I should think ahead to 2019. But I'm not sure how that works or if I can. Will I lose the remaining $1500 investment? Or is there a way to capture it in the gains? I also have a kitchen remodel from a previous year which has not fully depreciated.
4 Replies
Level 20

How to calculate undepreciated improvements at sell?

Step one ... enter the asset in the 2018 program to depreciate it correctly. 

 

Step two ... sell the asset in a different tax year and capture the undepreciated amount automatically. 

Level 20

How to calculate undepreciated improvements at sell?

I put new carpet in a rental in 2018. I'm thinking to include as an asset

You can add it as an asset. It gets depreciated over 5 years. However, if the asset cost you less than $5000 the IRS says you can just expense it in the year the cost is incurred. I seriously doubt you paid more than $5K for carpet in a rental property. (In your primary residence I could see paying more than $5K; but not in rental property)

I already running a loss for that property.

Many times folks think they're running a loss when the fact is, they are not. One thing that contributes to that line of thinking is the fact that rental property *RARELY* shows a taxable gain at tax time when filling out the taxes. That's not because of all the deductions alone, but more because of the depreciation you are required to take on the property by law. Especially if you have a mortage on the property. When you add up the deductions of mortgage interest, property taxes, rental dwelling insurance and depreciation those four items alone will usually add up to more than you collected in rent for the entire year. Then add to that your other deductible rental expenses and that makes it rare to show any taxable profit.

Understand that rental income is passive, which means the expenses are passive too. You can only deduct your passive rental expenses against the passive rental income. Once those expenses get your taxable passive income to zero, that's it. Any remaining expenses are just carried over to the next year. Then the next year you have the same situation so your carry over losses will just increase with each passing year.

But when you sell the property, then in the year of sale you can "realize" those carry forward losses against other "ordinary" income; starting with any gain realized on the sale.

I ended up selling that property for a gain in 2019. So, I was thinking to carry over the remaining depreciation to use against my capitol gains.

What exactly do you think you're going to do with that "remaining depreciation"? Deduct it? That's now how it works. In the  year you sell the property all depreciation taken on it has to be recaptured and you pay taxes on that recaptured depreciation. It also adds to your AGI. Additionally the recaptured depreciation is taxed at a minimum of 15% and a maximum of 25%. This can hurt if your AGI (figured after taking into account your gain on the sale) puts you in the 12% tax bracket or lower. It can help if your AGI puts you in a tax bracket above 25% - then the recaptured depreciation would only be taxed at 25% at the most.

Since I am working with an extended return,

Can you define for me please what you mean by "extended" return?

I figure I should think ahead to 2019. But I'm not sure how that works or if I can. Will I lose the remaining $1500 investment?

When you sell the property your taxable gain is the amount you make "OVER" the adjusted cost basis of the property.

Now this is rough, but to figure the cost basis: What you paid for the property, plus what you paid for any property improvements while you owned it, minus the total of all depreciation taken. That gives you the adjusted cost basis. Subtract that number from your sales price and that's your taxable gain. Now from that gain you also get to deduct things like your carried forward losses, sales expenses and a few other incidentals. That can easily lower your taxable gain by another $5K; or significantly more depending on how much carry forward losses have accumulated.  While this is a rough figure, it's good enough to get you "in the ballpark" of what you can expect.

I also have a kitchen remodel from a previous year which has not fully depreciated.

Not a big deal. Generally when someone sells rental property it's rare for the property to already be fully depreciated. Besides, the more depreciation you have and are required to recapture, the more it can hurt on the tax front since recaptured depreciation is taxed within a fixed range regardless of what tax bracket your AGI may put you in.

Level 18

How to calculate undepreciated improvements at sell?

say as above the cost was less than $5,000,   either take as an expense (best because there is no recapture)   any loss disallowed is allowed in the year the property is sold so you would get the deduction in 2019.    or you could take depreciation on it.   thus the basis would go up by the undepreciated value reducing the gain. that part of the gain attributable to depreciation allowed or allowable on the property  is recapture as section 1250 gain.  This includes depreciation on the building and any capital improvements such as the kitchen remodeling. 

the rates on 1250 gain are generally higher that the capital gain rates. .  

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Level 20

How to calculate undepreciated improvements at sell?

Q. Will I lose the remaining $1500 investment (undepreciated amount)?

 

A. No. You include the undepreciated amount as basis, in calculating the gain or loss. 

 

For example, let's use $2000 as carpet cost.  Let's also say the original cost of the house was $100,000 and you sold for $150,000.  At the time, you sell, you had claimed $500 of depreciation on the carpet and $25,000 on the house.    Your report  a sale price of $150,000 and a cost basis of 102,000 (100K + 2K) for a gain of $48,000.  Then you enter $25,500 (25,000 + 500) as depreciation recapture.  Your total gain is $73,500 (48,000 + 25,500) of which $25, 500 is section 1250 gain (taxed as ordinary income but not more than 25%).