Depreciation Recapture - Former Rental Property

[Yardley CPA]

Would appreciate your insights on this situation:

• Domestic partners purchased a vacation home in May 2000, each owned 50%.
• They rented the home from 2000 through October 2012.
• Home purchase price (not including land) was $199,900, land valued at approximately $70,000.
• Rental income and expenses were split evenly on their individual returns.
• Each depreciated $99,950 and Accumulated Depreciation through October 2012 amounted to 45,880 for each of them.
• They married in November 2012 and moved into this home, utilizing it as their primary residence from that point on to the present date.   
• They have now put the home up for sale, asking price of $489,900.
• Assuming they receive $450,000 as the selling price, what if any depreciation recapture needs to be dealt with and how?

This is my first time dealing with recapture and I have been investigating it but would appreciate your thoughts.  I believe recapture will be involved, how do I account for it?  Thank you.

[Pacun]

Let round off some numbers. So they took depreciation for $100K and their house cost in 2000, $270K.

Let me assume the house is sold in August 2018 for $450K. So the gain is $280K. Since they have owned and lived in the house for 2 years in the last 5 years, we can take up to $500K, PROVIDED They have not use the exclusion in the past 24 months. Since the gain will be $280, the credit will take care of it. Now we have to talk about depreciation and non-qualified time.

Non-qualified time is January 2009 until October 2012. So from May 2000 until August 2018, we have 219 months of which 46 (Jan 2009 through Oct 2012) were non-qualified months. So the gain will have to be reduced and now the $280 will become: $280/219*(219-46)=$221,187. We have $58,813 that the house gained while it was rented and is NOT allowed to be "killed" by the exclusion. Since your clients will pay taxes at 25% on the depreciation allowed or allowable, they will pay roughly $25K and I am not sure if that will take care of the non-qualified time the house was for rent.

I am not sure if by paying taxes on those $100 of depreciation allowed, they don't have to worry about other taxes since they will use the exclusion.  Also, adding improvements and deduction casualty loss (for example) will change these numbers.

 

[Yardley CPA]

Pacun...I very much appreciate your reply.  I assume this is handled on Schedule D and can be listed as nonqualified gain?

[Pacun]

This is the way this worked out. If I added 100K in a W-2, then AMT kicks in but remember you will be using the 2018 ATX software package.

When I clicked on form 8949, under options, I selected type of transaction 2, but please correct me if I am wrong.

Then I clicked on “Sale Principal Residence” on the bottom choices.  I entered “House” on the description of property.  I entered 05/01/2000 as the purchased date and 08/31/2018 as the selling date. The software automatically calculates the total number of days you owned the property. Then you have to enter only the non-qualified days which are 1,399 days. Why will you pull out the calculator and add every month (46 months) when you could simply state that the non qualified days are the “date purchased” and the “date sold” AND then the computer will give you the exact number of days.  Let me explain it a bit, not for you for the others (I know you are smart). Enter 01/01/2009 and 10/31/2012 and put the computer to work to give a total of days of 1,399, which are the non-qualified days. Once you took note of the non-qualified days, please enter the correct dates. The rest if just answering yes or no and entering $100K on the accumulated depreciation.  A video is worth it 100 pictures but I don’t have a video…. So I have a picture… so I am attaching a pdf. Please don’t argue that a pdf is not a picture.

 

CPAYARDLEYandATX.pdf

[Pacun]

These are the worksheets to see where the numbers come from and how to enter the info.

CPAYARDLEYWorksheets.pdf

[Pacun]

No one has commented? I thought I was doing it wrong. Not every year you get an exclusion from a house that was rented. Not only you have to research it but also you have to figure out how to enter the info on ATX.  I saw the video on another post, maybe each one of us should share something we researched and post from A to Z so when tax season comes, it is easier for other to follow.

 

[Abby Normal]

It seems silly that they say to count home office because it is also simultaneously used as your main residence, in most cases, so you would enter zero for number of days not used as principal residence. Right?

[Pacun]

That's very interesting. Let's say you owned a house for three years and it was your principal residence for the three years. You also run a business and you use 1/3 of your house as a home office.  Let's say that the house cost $390K and you sell it for $540K.  Technically you could approach this instance in two ways:
1.- You report 2/3 of the sale as a principal residence and use the exclusion to kill the $100K profit. AND
 You report the sale of a business asset and report its cost as $130K and depreciation taken $30K. Then you will have a profit $80K and you will pay taxes on it. (will $30K of depreciation recapture be reported as ordinary income)?

2.- You report the sale as I reported it on the 1040 above and just entered 0 days (as you said... but I am not sure it is correct). If you do that, you will have to pay taxes ONLY on $30K which to me doesn't sound right. The $150K of profit will be killed by the exclusion... I hope someone else researches this instance and finds out that you have to enter 365 days (1/3 of three years) as the non-qualified days and then you will pay taxes on $80K as we did in option 1.

One thing these examples tell us is that we don't know how much we don't know.