Re sale of rental, should I leave on list of assets carpet that was replaced prior to year of sale? If so, should I allocate a portion of the sale price to that carpet?

[DS30 · Accepted solution]

Yes, you will need to allocate the net sales proceeds to all the assets sold under your rental sales transaction.

The allocation of the sales proceeds to the rental property and the rental assets is done on a percentage of cost basis.

So if sales proceeds are $100,000 with $20,000 allocated to land and $80,000 allocated to the building structures, you will further allocate this total for the rental structures to each structure (rental house plus capital improvements) based on each assets original cost over the total of all original costs for these assets.

If the original cost basis of the rental house was $40,000, the carpet was $5,000 and the roof was $10,000. Then the allocation of the $80,000 of sales proceeds would be: rental house - $58,182 (40,000/55,000 * 80,000), carpet- $7,273 (5,000/55,000 * 80,000) and roof - $14,545 (10,000/55,000 * 80,000).

Additionally, when you sell your property, you must pay 25 percent recapture tax (also referred to as Section 1250 recapture) as well as regular state income tax on the depreciation you claimed. (Remember the IRS will assume that you claimed the correct amount of depreciation every year—this is true regardless of whether you actually claimed any depreciation on your tax return).

Click for more information about depreciation on rental property

[craighansonil]

Thanks for your reply. To clarify my question, I need to provide more information. One of the improvements that I have depreciated in past years is carpeting. I replaced carpeting three times over several years. Each time I replaced the carpet, I created a separate asset for each carpeting that was installed. I depreciated each carpeting asset over 5 years. Even though the carpeting was replaced, the replaced carpeting remains on my list of assets for this property.

Now that I have sold the property, should I delete from the asset list the carpeting that was replaced in prior years OR should I leave the old carpet on the list, and allocate a portion of the sale price of the condo to each of the past carpet assets?

[DS30]

You can just delete the old replaced carpet assets and just allocate the sales price to any assets that are still part of the property and have not been replaced when the property was sold.