Depreciation Recapture

[ETAXTEAM]

How to report the sale and the depreciation recapture using this scenario?
Client owns a personal residence for past 6 years with 3 floors of which 2 floors have been rented and 1 floor used as personal residence. Depreciation was claimed for the 2 floors on Schedule E. Now the total property has been sold. Selling price $400,000, cost basis plus selling expense is $250,000 with accumulated depreciation $65,000 (total for property).

[TaxGuyBill]

Are the two rented floors a separate "Dwelling Unit" (separate kitchen, bath, sleeping, usually a separate entrance)? Was it rented the entire time, or were those two floors previously used for personal purposes (and if ever used for personal, give details)?

[ETAXTEAM]

To TaxGuyBill,
The two rented floors were separate "Dwelling Units" and rented most of the time.

[TaxGuyBill]

Treat it as two separate sales.

The home may not necessarily be split 1/3 and 2/3, but for explaining, let's assume that it is.

The personal portion of the home would be reported as a Basis of $83,333 with a selling price of $133,333 on Form 8949. Then using the $250,000/$500,000 exclusion (assuming they qualify for it), that will eliminate the tax on the personal portion.

The rental portion of the home would be reported with a starting Basis of $166,667 and a selling price of $266,667 on Form 4797. If the entire $65,000 of depreciation was for the home itself (but see note later), the total gain would be $165,000. Of that $165,000 gain, $100,000 would be long-term capital gain and the $65,000 would be Unrecaptured Section 1250 Gain (taxed at regular rates, up to 25%).

Does that make sense?


However, $65,000 of depreciation seems too high for the building itself. Does that include other things, such as appliances, carpeting, etc.?

[ETAXTEAM]

A big THANK YOU to TaxGuyBill. Your explanation helped me understand how to split the sale to report only the business portion for capital gain tax and depreciation recapture under ?1250. It worked out.