My understanding is that a residential rental property is classified as a 1250 property, and that the depreciation claimed should be taxed as ordinary income when you dispose of the property. But what happen if you dispose of a 1250 property in a 1031 exchange? How and when should the depreciation that you have claimed be recaptured and be taxed as ordinary income?
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The gain that is attributed to prior depreciation on a rental property produces Unrecaptured 1250 gain, subject to a maximum capital gain rate of 25%. It is not subject to ordinary income tax.
As for a 1031 exchange, none of the gain is taxable if it is a 1031 exchange, including prior depreciation on the property traded. It is only when the new property acquired through the 1031 exchange gets sold under a non-1031 exchange that the gain from the old property gets taxed. -
Originally posted by Bees Knees View Post
Thank you Bees Knees. I hope I understand what you said there correctly.
Supposed you have an old rental property which has a total accumulated depreciation of $50,000. You exchange it to a new replacement rental property in a 1031 tax-deferred exchange. Assume that all the other requirements are fulfilled, the tax on the $50,000 accumulated depreciation would be deferred and rolled over to the replacement property. If you decide to sell the replacement property a few years later, that $50,000 deferred accumulated depreciation of the old property will be taxed at the maximum capital gain tax rate of 25%.
Please let me know if there is anything that is not correct in the example. Thank you very much.Comment
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In a 1031 exchange, the new property gets the basis of the old property exchanged. Therefore, the accumulated depreciation carries over to the new property as well, and you would get unrecaptured 1250 gain treatment upon its sale.Comment
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Confused as well
Bees,
On a 1031 exchange, the old basis (which reflects depreciation, etc) is then transferred into the new 1031 exchange (received) property. That then should reflect accordingly any of the old accumulated deprecation for Sect 1250, if at a later date the current 1031 property is sold and not part of a 1031 exchange, (end of the road transaction).
We should not have to go backwards and "pull" old records for prior depreciation for Sect 1250, on any prior 1031 transactions that had "rolled into" the last and final transaction at time of sale. ?
There was a prior post on this a few days ago www.thetaxbook.com/forums/showthread.php?t=5812
SandyComment
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my two cents
If you create new and old basis the old depreciation will be tracked that way. I gave up on using this method after following the regs a couple of times and realizing how time intensive it was vs any tax savings to the tax payer.
I now make the election to set up only new assets and track the deferred and recognized gain and all its components on a spreadsheet I created for this purpose. The spreadsheet also tracks interstate exchanges, so we can remember to declare the gain ultimately in the appropriate states.
As gain is recognized, the unrecaptured sec 1250 is taxed first (there are sometimes exchanges with partial recognized gains) and I can track the flow of any remaining gain through subsequent exchanges.
So far this has worked pretty well. Easy to do going forward, difficult if you're dealing with exchanges that happened years ago.
Hope that helps.Comment
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