Depreciation used for Sale of Rental Property - Does this look correct?

[cactusjack]

I'm just looking for a reality check regarding how depreciation is calculated relating to the sale of a rental home.   The numbers below are rounded and simplified as I'm just looking for a big-picture check.  

State = Arizona

Rental home purchased 10/3/05 for $307,000

Rental Home sold 9/9/21 for $360,000

Excluding depreciation, the capital gain would only be around $53k.  However, Turbotax is showing about $139k of depreciation, increasing the capital gain to around $192k.

Adjusted cost basis = $307k minus $139k = $168k

Capital gain = $360k - $168k = $192k

We have been accounting for depreciation each year from a tax standpoint.

Does the $192k capital gain sound reasonable?  I was just a little shocked to be paying taxes on a gain of $191k  compared to the nominal gain of $53k.

Thanks.

[Anonymous_]

That actually does sound reasonable, depending upon the value you assigned to the land.

Total depreciation deductions are recaptured when you sell the property and are subject to being taxed at your ordinary income tax rate (up to a maximum of 25%).

[cactusjack]

Thanks for the response.  I've dialed it in more, but it's looking worse now as far as how much tax is owed. See below.

Cost basis excluding land, plus sale expenses = $231,414.

Depreciation (or depletion) allowed or allowable = $137,701 (calculated by Turbotax).

Adjusted basis = $231,414 - $137,701 = $96,713

Total Gain = $360,000 - $96,713 = $263,287 (Ouch!)

Questions:

1. Given the new information, does this still look correct?

2. Should the sale price exclude land or show land + house ($360k is land + house)?

3. Where did the $137,701 come from?  Is this the straight-line depreciation calculation?

4. I only own 75% of this property.  I've entered the 75% value during the rental property interview section and chose to let Turbotax do the math, but it appears that I'm getting dinged for 100% of the gain.   Do I need to make a manual adjustment, or is there a way to verify that I'm only getting hit for 75% of the gains?  All numbers above are for total amounts and not 75% amounts.

5. Assuming I've accounted for related expenses, etc. properly, are there other considerations I should explore to try and reduce taxes on this gain?

Thanks again.

[Anonymous_]

The figures look reasonably accurate and there is really nothing you can do at this point to reduce the taxes on the gain/recapture (too late for a 1031 exchange, for example).

[Anonymous_ · Accepted solution]

The figure you posted is straight-line depreciation over a 27.5 year recovery period, which is the standard for residential real estate.

The program will not adjust an asset sale for a percentage of ownership that is less than 100% (it will for other expenses, though). Therefore, you will have to make the adjustment manually.

You can also just enter the total sales price (less selling expenses).