Rental Property Depreciation

[mrbill]

Client sold home which was 50% rental. Over the 25 years of ownership, they accumulated $70K in depreciation (MACRS - 27.5). Is this depreciation amount taxed at 25% ? The regs seem to say so. Thanks,

[erchess]

I think you're right

I couldn't have told you the tax rate but yes the depreciation ends up being recaptured, I think as a decrease in basis (as if the taxpayer had paid that much less to buy the property) and isn't the sale of the rental part reported on F 4797 and then carried to Sch D? You don't discuss the other half of the building so I guess you know how that part gets reported.

[David1980]

Tax rate of up to 25%. If taxpayer is in lower marginal tax bracket than 25%, it would be taxed at a lower %.

[taxmom34]

sale is reported on 4797 and the depreciation is treated as ordinary income and goes directly on 1040 in year of sale (in case there is installment sale the gain is calculated seperately)

[Maribeth]

Client sold home which was 50% rental. Over the 25 years of ownership, they accumulated $70K in depreciation (MACRS - 27.5). Is this depreciation amount taxed at 25% ? The regs seem to say so. Thanks,

The portion of the gain that is attributable to prior years depreciation is considered to be unrecapatured §1250 gain. It is capital gain; however it can be taxed at a rate up to 25% instead of the maximum 15% rate for regular capital gain property.

Of the total gain on the sale, you must determine the portion attributable to depreciation and the portion attributable to appreciation.

For example: selling price 200,000; basis 175,000; prior depreciation 75,000.

Total gain is 100,000. Of that gain, 75,000 is unrecaptured §1250 gain and 25,000 is regular capital gain.

If the sale is an installment sale, the unrecaptured §1250 gain is recognized first.

Be careful here. You say that they owned the property for 25 years. That gets up back to 1986. The property could have been ACRS 19 year property and the taxability of the sale would be different than above.

Maribeth

[Gary2]

Be careful here. You say that they owned the property for 25 years. That gets up back to 1986. The property could have been ACRS 19 year property and the taxability of the sale would be different than above.

I'll raise you one, with a different situation. A commercial property was put into a trust upon the death of the owners, back in the mid-60s. The last of the first generation passed away recently, so the trust is being dissolved and the property transferred to the grandchildren.

Presumably the original, stepped-up basis has been fully depreciated. Most, if not all improvements along the way would have been leasehold improvements, which I presume were depreciated by the tenant.

So what would the tax treatment be if it were to be sold now? Or perhaps I should ask what information is needed to determine the tax treatment? Is it sufficient to know that the trust hasn't reported any new depreciable items since the 80s?

[abby]

For example: selling price 200,000; basis 175,000; prior depreciation 75,000.

Total gain is 100,000. Of that gain, 75,000 is unrecaptured §1250 gain and 25,000 is regular capital gain.

Maribeth

To add to this: Gain allocated to land can reduce the amount of gain subject to the section 1250 unrecaptured gain rules.
If, say, 30% of the $100,000 gain is allocated to the land, then only $70,000 of the gain would be allocated to the building and the section 1250 unrecaptured gain taxed at a top rate of 25% would be limited to that $70,000 even if the depreciation taken was $75,000.

[Davc]

Assuming it is ACRS property then any gain will be composed of 3 elements. The only thing recaptured is the excess of depreciation over straight line taken on the building and other improvements. Any Unrecaptured 1250 is capital gain capped at the 25% rate and is recognized before any appreciation gain on building and improvements if it's an installment sale.

The gain on the land is straight long term capital gain taxed like any other.