Sold rental, allocating land vs improvements. Weird case

[Mr Mastodon Farm]

We bought a rental for 33000.  At the time, the land was valued at 29,700 and the improvements at 3300.  When we sold it, the latest tax info said the land was 35329 and the improvements were 3920.  When  I allocate the sales price, does this seem to be acceptable to percent it the same?  It sold for 220000. that would make it 10% for improvements and 90% for land?  That seems crazy.

[IamJen]

If you were depreciating the improvements, how much were you depreciating? Did you split the asset that way when you purchased it, in other words? Did you add any improvements to the land? Property tax is sometimes only revalued once every 10 years, so it may not have been adjusted other than small inflation adjustments.

[Mr Mastodon Farm]

We've done renovations to the land and the home, we've owned it almost 15 years and the tax numbers have been consistent.  As far as depreciating, I'll be honest and admit I have no idea, I let TurboTax figure all that out.  I've never sold a home before and this was a rental from day one (We already had tenants waiting to move in when it closed

[KrisD15]

When a rental is sold, there are usually two types of income generated

Depreciation Recapture

Capital Gain 

When you started the rental, you should have entered the land and the building

Land does not depreciate

Buildings (improvements) do, and rental buildings depreciate over 27.5 years. 

Whenever you made "improvements" such as a new roof, or added appliances, those assets SHOULD HAVE been entered, and they would depreciate at whatever their particular depreciation life is. 

When you sell, you first adjust the basis for the depreciable assets. 

If the land started at 29,700, the basis of the land will stay at 29,700.

If the building stated with a basis of 3,300, and it was depreciated 1,500, the adjusted basis is 1,800

If there were other assets added, they would also be adjusted by the amount of depreciation taken (or should have been taken) 

Yes, 90% land and 10% building was the proportion when you bought, but was it when you sold? 

Lets say YES, ok so you sold for 220,000.

198,000 for the land and 22,000 for the building. 

That gives you a capital gain for the land of 168,300

Depreciation recapture of 1,500 and Capital Gain of 18,700 on the building

1,500 (depreciation recapture) is ordinary Income

187,000 Capital Gain 

Lets say we allocate it 50% between land and building 

110,000 for the land 

110,000 for the building

That gives a capital gain on the land of 80,300

Depreciation Recapture of 1,500 and capital gain of 106,700

1,500 (depreciation recapture) is ordinary income

187,000 capital gain

The result is the same. 

Depreciation is recorded on Form 4562 which should have been part of your tax return each year you filed with the rental. 

That form will tell you the prior years' depreciation. 

Be sure to enter the expenses and income and time it was a rental in 2022 before you sold it.