Depreciation Recapture

[Haylee K]

I have a client that sold her rental property this year and I want to be sure I'm understanding depreciation recapture/capital gains correctly...

The cost basis in the property was $33,010.00
Depreciation had been taken at $11,602.00
Sold the property for $28,000.00

It is my understanding that the depreciation taken creates an adjusted cost basis of $21,408.00. Since she sold the property for $28,000 doesn't this leave her with $6,592.00 subject to depreciation recapture at ordinary income tax rates?

Also, is there an exclusion if she sold the property and then re-invested the money into another property within one year?

She's one of the argumentative types and I'm second guessing everything now. Thanks for any help you can give!

[Dude]

For a deferred exchange the replacement property must be identified within 45 days and received within 180 days. https://www.irs.gov/pub/irs-pdf/i8824.pdf.

[kathyc2]

Numbers look correct, just make sure to reduce the 28K by such items as fees and commissions if not done already. If she meets the cumbersome rules of a 1031 exchange, it's not an exclusion but rather a deferral where gain is not recognized until second property is sold or no longer qualifies.

[TaxGuyBill]

Yes, that is the Adjusted Basis and Gain. The gain is actually called "Unrecaptured Section 1250 Gain" (not "recapture") and is taxed at ordinary tax rates up to 25%.

No, there is no exclusion. A §1031 Exchange could have been done to defer the gain into another rental property, but that pretty much needs to be done through a 3rd party that specializes in that. It has already been sold, so it is too late for that now.

[Haylee K]

She doesn't meet the criteria for 1031 exchange. She sold and then bought without consulting me (I would have told her to do 1031!) and now doesn't like that there is $715 of tax.

Thanks for your responses!

[Rapid Robert]

It's hard to imagine what kind of rental property could be sold at FMV of $28K -- was it a storage locker or something? Even the cheapest states have a median value of about $100/sq.ft. for home sales.