Recover FMV Loss

[Snaggletooth]

Wonder if taxpayer can ever recover this:

2007 Home purchased $145,000
2011 Could not sell, converted to Rental:
FMV in 2011 $115,000
Value of land $ 11,500
Basis for Depreciation: $103,500

2011-17 Depreciation Taken: $ 28,000

2018 Sold for $165,000 after expenses

It looks like reporting on the 4797 looks like:
Sales amount $165,000
Depreciation Taken $ 28,000
Orig. Basis of House and Land($115,000)
Reportable Gain: $ 78,000

and character of gain:
Section 1245 recapture $ 28,000
Capital Gain (to Sch D) $ 50,000

After all this numerical presentation, my question is: "Can the taxpayer ever recover the
$30,000 loss to FMV upon converting to rental?"

[Roland Slugg]

$115k became the property's basis for depreciation and its basis for determining LOSS on its sale. Its basis for determining GAIN, however, remains at $145k.

Accordingly, using your hypothetical figures the gain on the property's sale would be $48k ... i.e. $165k -$145k + $28k.

The $28k of depreciation taken is NOT §1245 recapture. There is no such thing as "recapture" on the sale of real estate except for real estate placed in service before 1981, and even then it would be rare. The $28k of depreciation is "Unrecaptured §1250 Gain." As such it might be taxed as ordinary income but at a maximum tax rate of 25%. However, some or all of the Unrecaptured §1250 Gain might not end up being taxed as ordinary income at all. It depends on the taxpayer's overall capital gains and losses in the year it arises.

[Corduroy Frog]

Thanks Roland Old ACRS stuff

You are quite correct - this is s.1250 recapture and not s.1245. And this is ALL capital gain in this
example.

I remember the freakish election from the old ACRS days. Accelerated Depreciation in those days launched
recapture of ORDINARY INCOME, whereas Straight Line election meant no portion of the depreciation would
be ordinary income. Scary at the time...

So the answer to the question is YES the taxpayer can reclaim the lost $20K in basis if a gain is reported, but cannot reclaim it if reporting a loss. And I guess this means there is a "gap" where the numbers fall into a sort of Twilight Zone and zero gain/loss is reported.

[Roland Slugg]

this is s.1250 recapture and not s.1245.

No, Mr. Frog, that is NOT TRUE! Please read my above reply again. There is NO recapture ... at all.

And this is ALL capital gain in this example.

That is correct. However, that portion of the LTCG that's equal to the total depreciation taken will be "Unrecaptured §1250 Gain," and as such it means that some or all of it may be taxed as ordinary income, but at a tax rate no higher than 25%.

the taxpayer can reclaim the lost $20K in basis if a gain is reported, but cannot reclaim it if reporting a loss. And I guess this means there is a "gap" where the numbers fall into a sort of Twilight Zone and zero gain/loss is reported.

Bingo! When an asset has dual bases ... one basis for figuring gain and a second, lower basis for figuring loss ... then if you use the "gain basis" and get a loss, but if you use the "loss basis" and get a gain, then there is neither a taxable gain nor a loss.