Depreciation Recapture

[ATSMAN]

80 year old taxpayer getting ready to go to the nursing home for good. No spouse or children but he owns a very large house on 5 acres of land in a nice neighborhood that has seen property prices appreciate even during the decline years!

Problem:

This house used to be a three family home that was rented except one floor most of the time during the 60,70, 80 and mid 90s. It was then remodeled into a one family home with inlaw apartment that was used by his in-laws until their death. Taxpayer sold the house and land in December 2015. He does not have any records of depreciation claimed (if any) in all those years when he rented and does not know how to get records since his previous preparer before I got involved is also deceased. Taxpayer has return copies for the last 7 years only but that does not help!

We have records of what the house was worth in the 60's when it was constructed from town records and also what the value of the remodel was from permit data. We also have the sales data obviously.

How do I go about figuring depreciation because the property was sold for substantial gain. I know the depreciation method was different before MACRS.

Would IRS have tax return transcript going back decades?

Speaking to his closing attorney, I get the impression he wants me to "ignore" depreciation issues because it is as he put it "ancient history". The house was his primary residence since the mid 90s.

[Burke]

If the property began as rental property back in the 60's, then you can safely assume that the original depreciable basis is now zero, unless his last 7 years' tax returns show any different.

You said in-laws began living in it in the "mid-90's until their death." Was it treated as rental property during that time? More importantly, did your client live in the property two out of the last 5 years to qualify for 121(a) exclusion? If so, that would benefit your client immensely. See cite below.

https://www.irs.gov/pub/irs-wd/0630015.pdf.

Transcripts from the IRS would not help, as they would only show net Sche E income, and I think you can only get the last 10 years anyway.

[TaxGuyBill]

This house used to be a three family home that was rented except one floor most of the time during the 60,70, 80 and mid 90s.

As Burke said, the fully rented homes will have a basis of $0. Don't even bother figuring out the depreciation for that portion of the home(s). The other portion may still have some basis. You would need to figure out if/when that portion was rented out, and reduce the basis by what COULD have been claimed, regardless of what was actually claimed.

As Burke also pointed out, because it was the taxpayer's "primary residence since the mid 90's", it probably qualifies for the 2-out-of-5 year §121 exclusion. That exclusion CAN be used against the pre-1997 depreciation.