Discussion:Personal residence rented, no dep'n taken
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Beth4taxes (talk|edits) said: | 13 February 2007 |
| If a client satisfies sthe 2 of 5 yr rules for exclusion of gain on personal residence but rents the property for 9 months before the sale, must I take depreciation on that property for those 9 months and thus be forced to pick up gain for the depreciation recapture in year of sale? I'd like to not claim depreciation in 06 and just exclude the entire gain on sale of residence in 07. Is this allowed? The law confused me as it states that allowed or allowable depreciation must be recaptured. As if even though I haven't claimed the deduction I still must pick up recapture gain. | |
| February 13, 2007 | |
| Yes, you should deduct depreciation expense in 06 and show the recapture. See the middle of page 5 in Publication 527. | |
| February 13, 2007 | |
| And it'll wash at worst, Beth. You'll deduct it this year and repay it next. At best, tho', sometimes you're deducting depreciation at a higher rate than the 25% recapture, and benefit from some bracket split. | |
| 13 February 2007 | |
| or in my case, I took depreciation on rentals back when I was in the 15% bracket, and pay it back at 25% | |
Beth4taxes (talk|edits) said: | 13 February 2007 |
| Thanks for such quick responses. I've wasted so much time pondering this. This is why I make no money. Thanks again, and happy tax season and Valentine's Day (tomorrow). | |
| 14 February 2007 | |
| I think that's a great question especially for real estate that doesn't qualify for the Sec. 121 exclusion. On the one hand, the adjusted basis of property sold must take into account depreciation allowed or allowable. So, it would be foolish not to take the deduction.
On the other hand, the tax benefit rule says that no income is realized from a transaction for which there was previously no tax benefit. A common example is state tax income tax refund received for a year when the standard deduction was use. So, if you never got tax benefit for depreciation not taken, you wouldn't have to use it as a basis reduction. What are others' thoughts/knowledge/experience on this? -- Larry Hess, CPA, Albuquerque, NM - Talk to me | |
| 14 February 2007 | |
| Yes, but the ordering rules of where the deduction is taken (this would flow to page 1 of the 1040) say that it could result in less income, and you got the tax benefit of that lesser income. You just didn't get the tax benefit of your standard deduction or personal exemptions (if income was low enough). | |
| 14 February 2007 | |
| NO DEPRECIATION IS ALLOWED IN YEAR PROPERTY IS PLACED IN SERVICE AND DISPOSED OF. | |
| 14 February 2007 | |
| Kevin, I don't think I understand what you mean in relation to my question about allowed or allowable. Would you try to explain it another way? -- Larry Hess, CPA, Albuquerque, NM - Talk to me | |
| 14 February 2007 | |
| I don't care what the IRS says, the instructions and press releases are for laymen, not professionals. The tax code, regs and case law are for us. | |
| 14 February 2007 | |
| Larry, depreciation of $500 reduces Sch E income by $500. This flows to 1040 page 1. Example: Wages $8,000. Sch E $2,000 (after $500 in depreciation), AGI = $10,000. married std ded of $10,300 and exemptions of $6,600. Was there a tax benefit from the depreciation? NO. Is it allowed or allowable? Yes. | |
| 14 February 2007 | |
| Got it. But my question is whether depreciation is required? This comes up all the time with the home office deduction. -- Larry Hess, CPA, Albuquerque, NM - Talk to me | |
| 14 February 2007 | |
| PS. Hadlin, that would be a good CPA exam question, wouldn't it? | |
| 14 February 2007 | |
| Kevinh5,
I guess i was overzealous. Could you point me to the reg which would help clarify the irs publication for me. | |
| 14 February 2007 | |
| But is this really rental property? May need more facts. I don't have a citation on this, but I remember being taught that you couldn't take a loss on a temporary rental while trying to sell -- ie, it's not rental property, and therefore no depreciation is "allowable." Sorry to quote Lasser's here, but they say that the IRS and various courts have conflicting decisions on this topic. Issues to be considered are whether there is a profit making purpose, whether the house is listed for sale, whether there is a lease and, if so, whether it prevents the owner from reoccupying during the lease period. Lasser says the IRS and Tax Court said "no loss" but that at least one fed appeals court has disagreed.
David H | |
| 17 February 2007 | |
| Hi Beth, Ditto on the time one wastes pondering. Sometimes the time and effort spent trying to keep something simple are more costly than just going with the flow and following the rules in the first place. Re: Dhtax's post: In that situation I believe the depreciation is allowable to the extent of the income after other expenses. | |
| 17 February 2007 | |
| Hi Kevin,
Your comment in a forum about claiming depreciation while in the 15% bracket and paying taxes on it later at 25% relates to a client I have who just purchased a $700K 3 unit rental property. She's in 15% now; I was leaning to using ADS 40 year S/L depreciation so when she sells (possibly in 5 years) she won't be in that situation. However, the "allowed or allowable" concept is worrying me. Your thoughts? 23:17, 16 February 2007 (CST)Tina | |
Psaund9860 (talk|edits) said: | 25 February 2007 |
| I have encountered this several times. If the intent was to sell the property and not have it as a rental...which is what I suppose happened here...it is "rented not for profit". The income will go on line 21 as "not for profit rental income". The expenses would then be put on Schedule "A" - misc deductions subject to 2% adjustment. | |
