I'll begin with some things I think most of us agree on. For those who do qualify for and wish to take OIH deductions, the law does require that the OIH be depreciated and if it isn't, the basis must be reduced by the amount of allowable depreciation. As a result, the amount of taxable recapture at the time of sale will be the amount of depreciation allowed or allowable. Thus taxes will paid on the depreciation recapture upon sale whether depeciation was taken or not.
I do agree, however, with an earlier post that put into question the definition of "allowed or allowable".
I searched the IRS site and was unable to find a specific definition but I did find the following quote on the Deloitte website. I know they are not a recognized authority but they did agree with what had always been my own understanding of the definiton. Here is how they defined allowed and allowable: "Taxpayer’s basis in an asset is reduced by the depreciation allowed (taken) or allowable (that could have been taken)"
I think most of us (probably not all) will agree with that definition.
So far, this clearly means then that the depreciation in an OIH MUST be recaptued whether taken or not. I think this stands up for ALL fully taxable sales.
At this point, however, lets bring up the exclusion for sale of home. The quote that was cited from Pub 587 DID NOT RELATE TO ALL SALES but related specifically and only to this issue of the $250,000/$500,000 exclusion of gain from the sale of a home when it said: "If you can show by adequate records or other evidence that the depreciation deduction allowed was less than the amount allowable, the amount you cannot exclude is the amount allowed."
So we come back to the definition of allowed and allowable. If we accept the Deloitte definition that allowed means "depreciation actually taken", then that quote from Pub 587 could be read this way, "If you can show by adequate records or other evidence that the depreciation deduction allowed (TAKEN) was less than the amount allowable (THAT COULD HAVE BEEN TAKEN), the amount you cannot exclude is the amount allowed."
So, if the depreciation "allowed (TAKEN)" was "0", then that is clearly less than the depreciation allowable (THAT COULD HAVE BEEN TAKEN).
To put some specific numbers to an illustration, lets say that the allowable depreciation over the years was $5000, but the taxpayer did not deduct any depreciation. Thus the depreciation "allowed (TAKEN)" was "0" while the depreciation "allowable (THAT COULD HAVE BEEN TAKEN)" was $5000. Again, "0" is clearly less than $5000.
If that can be proven, according to the quote from Pub 587, then "0" depreciation is the amount that "cannot be excluded". In other words, NO depreciation recaptiure needs to be used to reduce the sale of home exclusion. On the other hand, if the proof is not available, then the $5000 will be used to reduce the exclusion from the sale of home.
For the record, I believe that it is aways better to take depreciation for OIH, since there are far too many situations which fall outside the narrow set of circumstances described above.
Well, that's my 2 cents worth.
I do agree, however, with an earlier post that put into question the definition of "allowed or allowable".
I searched the IRS site and was unable to find a specific definition but I did find the following quote on the Deloitte website. I know they are not a recognized authority but they did agree with what had always been my own understanding of the definiton. Here is how they defined allowed and allowable: "Taxpayer’s basis in an asset is reduced by the depreciation allowed (taken) or allowable (that could have been taken)"
I think most of us (probably not all) will agree with that definition.
So far, this clearly means then that the depreciation in an OIH MUST be recaptued whether taken or not. I think this stands up for ALL fully taxable sales.
At this point, however, lets bring up the exclusion for sale of home. The quote that was cited from Pub 587 DID NOT RELATE TO ALL SALES but related specifically and only to this issue of the $250,000/$500,000 exclusion of gain from the sale of a home when it said: "If you can show by adequate records or other evidence that the depreciation deduction allowed was less than the amount allowable, the amount you cannot exclude is the amount allowed."
So we come back to the definition of allowed and allowable. If we accept the Deloitte definition that allowed means "depreciation actually taken", then that quote from Pub 587 could be read this way, "If you can show by adequate records or other evidence that the depreciation deduction allowed (TAKEN) was less than the amount allowable (THAT COULD HAVE BEEN TAKEN), the amount you cannot exclude is the amount allowed."
So, if the depreciation "allowed (TAKEN)" was "0", then that is clearly less than the depreciation allowable (THAT COULD HAVE BEEN TAKEN).
To put some specific numbers to an illustration, lets say that the allowable depreciation over the years was $5000, but the taxpayer did not deduct any depreciation. Thus the depreciation "allowed (TAKEN)" was "0" while the depreciation "allowable (THAT COULD HAVE BEEN TAKEN)" was $5000. Again, "0" is clearly less than $5000.
If that can be proven, according to the quote from Pub 587, then "0" depreciation is the amount that "cannot be excluded". In other words, NO depreciation recaptiure needs to be used to reduce the sale of home exclusion. On the other hand, if the proof is not available, then the $5000 will be used to reduce the exclusion from the sale of home.
For the record, I believe that it is aways better to take depreciation for OIH, since there are far too many situations which fall outside the narrow set of circumstances described above.
Well, that's my 2 cents worth.
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