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Disposition of Rental Property. Rental property: Gross sale…

Disposition of Rental Property.Rental property...
Disposition of Rental Property.Rental property :
Gross sale price: $600K
Cost or Other Basis plus Selling Expenses: $300K
Depreciation allowed or allowable: $100K (Form 4797 line 22)Adjustment: $300K - $100K = $200K
Gain = $600K -$200K = $400KWhy is the adjustment not $300K + $100K = $400K (i.e. depreciation should be cost item?)
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9/29/2017
emc011075
emc011075, Tax adviser
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Depreciation reduces your basis because you had been deducting it over the years. For instance, you bought the house for 100K. You cannot deduct 100K in the same year, you have to spread the deduction over several years. For the sake of simplicity, you deduct 5k every year. Every year you are getting back 5K of your purchase price. After 20 years you get back your 100K and you do not have any original basis (except the cost of improvements and cost of land). You have to reduce your basis by the amount of the depreciation you deducted because you already used it.

Lets just say you bought a stapler for $25. You can deduct $25 in the year you bought it but you cannot depreciate it anymore because you already recovered your cost. If you sell the stapler for $5 for you have $5 capital gains because you already deducted your cost in the first year. The same logic applies to the property, except that you have to recover your cost over several years, you cannot write it off in the first years, you have to depreciate it.

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Customer reply replied 4 months ago
in my example, why is it a -$100K and not +$100K? As you stated, this is a depreciation.

Because you have to reduce your basis, not increase it. There are couple of ways to determine your gains of depreciated property. You can increase your sale proceeds or reduce your basis.

Depreciation is an expense when depreciate the property. But when you sell it, it is an addition. You cannot deduct it twice. First to figure out your rental profit/loss and than again when you sell it.

Assuming the 300K represent your purchase price, cost of improvements and expenses of sale, you have to reduce your basis by 100K (the depreciation), because you already recoved it through the annual depreciation. Your adjusted basis is your purchase price, cost of improvements, expenses of sale reduced by depreciation.

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Customer reply replied 4 months ago
Thank you. I want to rate you for the answers - but the system will not allow me to do it. Please advice.

You're welcome. Is there anything else I can help you with today?

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