I have a client whose AGI continues to be so high he is completely phased out from deducting his Rental losses and continues to carry those losses forward. In fact my client so far was never able to take any losses, any tax year on his rental due to high AGI. What if his AGI is never low enough to use those carried forward losses and he sells the rental. Does he still have to recapture the depreciation if he sells the property for the same price as his cost basis?
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I would think unrecaptured 1250 gain would apply because upon fully disposing of the rental in a taxable transaction he will then use all of the suspended losses - which would include depreciation. -
Follow up question on disposition of rental property
So what happens when my client sells/disposes of his rental property and receives the same price as his cost basis? Are all his rental suspended/carry forward losses he never used due to high AGI, get wasted?Comment
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all losses released upon disposition
He will get full benefit for all suspended losses when he fully disposes of the property (meaning not an exchange or some other deferred transaction). He will get full benefit of all his deductions, including depreciation, at that time, so any unrecaptured sec 1250 gain due to depreciation will be taxable at a maximum of 25%.
IF he has taxable income after taking all those losses.
He will have a capital gain in all likelihood on sched 4797, but a large loss on sched E that will offset total income.
Also, when the sale is split between the land and the improvements, if the gain allocated to the improvements is less than the total depreciation allowed, then the 25% rate won't apply to more than that portion of the gain.
Hope that helpsComment
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