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zz3bcn
Level 2

Recaptured depreciation - when can I declare it as income

Do I have to wait until I sell the rental property to add the recaptured depreciation to mu AGI, or can I do it when I convert the property to personal use to stop all depreciation at that time?  I need to do some work on the house before I sell it.

 

JP

1 Best answer

Accepted Solutions
Mike9241
Level 15

Recaptured depreciation - when can I declare it as income

7 Replies
Mike9241
Level 15

Recaptured depreciation - when can I declare it as income

zz3bcn
Level 2

Recaptured depreciation - when can I declare it as income

Thank you. 

 

But I can stop the deprecation after my last rental by converting to personal use, correct? 

 

Utilities to maintain the property for selling, including the internet access that is required for  remote control of the thermostat , and is required by my solar panel lease would be considered as "carrying cost", correct?

 

Thank you again.

 

 

pk
Level 12
Level 12

Recaptured depreciation - when can I declare it as income

@zz3bcn , to be sure that we are talking about same "recapture", let me just explain how this is supposed to work for  rental property:

(a)  Suppose you acquired a rental property for $100,000, with a land value of $25,000.

(b) this means that your basis in the property is  $100,000 and depreciable basis is $75000 to be depreciated over the life of the property ( for US residential it 27.5 year ).

(c) This means  that you take a deduction on your schedule-E ( against the  gross income from rental ) approx $2700 per year.  If this results in a loss on thew whole operation you take advantage of the loss ( upto  passive activity limit of $25,000 for a couple ).

(d) Say now you rent out the property for  10 years , resulting in   approx  $27,000 of accumulated depreciation.

(e) If you now sell/dispose of the property ( not take  just suspend the rental activity ) the property for  $200,000 -----  1.    your  adjusted basis in the property is  Acquisition Basis  LESS Accumulated Depreciation ( I am assuming no improvements ).  2. Your GAIN is  Sales Proceeds  ( that is sales price LESS sales costs including last minute  repairs etc. required for sales, commissions, transfer taxes etc.;  3.  Your Capital Gain is  Gain LESS Accumulated Depreciation , and the accumulated  depreciation is now subject  depreciation re-capture i.e. taxed as ordinary income and not at capital rates.

(f)  So if I assume that the sales expenses  were $20,000 --- 

                Your Adjusted Basis is  100,000 less 27,000 = 73,000

                Your Sales Proceeds  is 200,000 less 20,000 = 180,000

                 Your Gain is 180,000 Less 73,000 =  107,000

                Capital Gain is 107,000 less  27,000 =  80,000

                Ordinary Gain  is 27,000  ( recapture amount )

 

Is this what you are talking about  or am I in left field ?

Does this make sense ? 

zz3bcn
Level 2

Recaptured depreciation - when can I declare it as income

I totally get it now - good explanation

 

But am I correct about my questions:

1 - By changing status from a rental property to personal use the depreciation stops (after last rental occurs)

2 - Utility expenses after that are considered "Carrying Cost" which can be added to the selling expense to reduce capital gains.

 

 

Carl
Level 15

Recaptured depreciation - when can I declare it as income

1 - By changing status from a rental property to personal use the depreciation stops (after last rental occurs)

Yes. You have to work through each individual asset to to that.

2 - Utility expenses after that are considered "Carrying Cost" which can be added to the selling expense to reduce capital gains.

Nope. Once you convert it to personal use, nothing after that date of conversion is deductible on SCH E. Absolutely nothing. The only deductions you can claim are all SCH A itemized deductions, and they are mortgage interest and property taxes. That's it.

If you sold the property shortly after the last tenant vacated, there's really no need to convert it back to a rental. Just leave it classified as a rental and report the sale in the SCH E section of the program.

zz3bcn
Level 2

Recaptured depreciation - when can I declare it as income

Utility expenses after that are considered "Carrying Cost" which can be added to the selling expense to reduce capital gains.

Nope. Once you convert it to personal use, nothing after that date of conversion is deductible on SCH E.

 

-------

 

But I thought those "carrying cost" could at least be used as a "sales expense" which would increase the basis.

zz3bcn
Level 2

Recaptured depreciation - when can I declare it as income

Will need to do more research on the topic of "Carrying cost.

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