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Category: Tax
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Experience:  I am an Enrolled Agent with the IRS for 25+ years. Thank you for allowing me to assist you!
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Rental Property Tax Ques Hi - I bought my property in 2005

Customer Question

Rental Property Tax Ques: Hi - I bought my property in 2005 at 249K, took the deppreciation for $38,269 and sold the rental 2010 for 200,000. Do i have to pay taxes on the deppreciation even if I had a major loss? Thank you
Submitted: 5 years ago.
Category: Tax
Expert:  Stephanie B. replied 5 years ago.

Stephanie B. :

This would be true if you sold the property at a gain. However, when the property is sold at a loss, there is no current recapture of depreciation because there is no gain. Your adjusted basis, from the information that you gave me, is $210,731. This is the cost of $249,000 less the depreciation taken of $38,269. If you sold it for $200,000, you have a loss of $10,731 which is $210,731 less the selling price of $200,000. The rule for Section 1250 property is gains to the extent of straight line depreciation allowed are considered Unrecaptured Section 1250 gain which is subject to the 25% capital gain rate. I would ask the accountant to review this again. Here is a link to a Money website. http://www.ehow.com/info_8132102_depreciation-fully-recaptured.html You can also review Publication 544 at the IRS website, www.irs.gov.

Customer:

How do we add the form if the property was a short sale and the title was in two names. Only one person took all the deductions and the depreciation on the rental property. the title company gave both of us 1099-s each of $100,000. however, only one claimed all the rental income and the expenses. Do we just have the one person do all claims on the return on the tax? That is what the accountant also advised.

Customer:

the property was in md.

Stephanie B. :

I can't answer the questions on the short sale as I am not familiar with them. I am not sure why only one person claimed all the income and expenses if multiple people owned the property. I can not answer who should claim the income on their returns. Do keep in mind that the 1099-S must be on both returns at least reporting it, even if it completely backed off of one return showing zero loss or zero gain or the IRS will send notice of nonreported income.

Stephanie B. :

Here is something that I just found on short sales. I am no longer sure that the answer I gave you originally will apply as I am not familiar with short sales. http://www.mortgage101.com/article/short-selling-rental-property

Stephanie B. :

Being that I am no longer confident in my depreciation answer, I can choose to opt out of this question so someone who is more familiar with the tax consequences of short sales can assist you.

Expert:  RLWEA replied 5 years ago.
Hello,

When you sell a rental property, part of the depreciation is subject to recapture. Normally real-estate is depreciated on what is called the Straight line method. However, there is also the MACRs straight line method which calculates depreciation a slightly higher percentage. So Stephanie was correct that you do have to recapture the depreciation amount this is more than straight line depreciation.

Depreciation recapture is the difference between your cost basis and your adjusted basis. Your adjusted basis is the cost basis less all depreciation allowed or allowable. Long-term capital gain is the difference between your selling price and your cost basis for assets owned for more than one year.

For example, if the property cost you $30,000 originally and you depreciated it down to zero (you shouldn't have depreciated the part allocable to land but let's assume you did) your adjusted basis is zero. If you sell the property for $100,000 net, $70,000 would be long-term capital gain and $30,000 would be recapture.

From the details you provided, you have a reportable loss. So if the depreciation was done on the straight line method, which I am going to presume it was...then you loss is the $49,000 plus any attorney costs, etc.. for the short sale. If you have to recapture any of the depreciation, you will still have a loss. You need to find out what method was used to depreciate the property. Since your accountant told you it was recapturable, it may be that he did use the straight line method...however, with that said, the MQACRS real estate method is not that much more aggressive. So I disagree with your accountant. Maybe some of it is, but not all, unless he did use the real estate code for depreciation.

Can you find out what method of depreciation was used...and what date it was placed in service and the date you sold it on short sale.

As to the two owners on title, yet only one took the write off for the property. The owner who has taken no write off will report the 1099-S for $100,000 and show it as passed through to you, your social security number. I.E. - Mr. Smith- Schedule D- Sale of Ha Rental Property - proceeds $100,000...Cost $100,000..net zero. Now you need to show the entire $200,000 sales price on your return. Your partner may also attach a supplemental statement that states: Sale Of Hawaii Rental Property- 1099-S received for $100,000 was a nominee distribution to your name and social security number. Their accountant should know how to handle this.

So I wait your reply in how the property was depreciated so I may assist you in calculating you actual recapture and loss on the property.

Thank you for allowing me to assist you.

Sincerely,

Robyn L. Wysong, EA

RLWEA, Accountant
Category: Tax
Satisfied Customers: 69
Experience: I am an Enrolled Agent with the IRS for 25+ years. Thank you for allowing me to assist you!
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