Another Rental Property Depreciation Question

Sure. But as noted before, you have already included the cost of the house in the basis of that property, and deductd depreciation expense for it.

The demolition expense is usually added to the basis of the land.

So you increase basis of the property by the demolition expense.

Yes. See above for demolition.

And starting 1/1/2009, if you try to get back your Section 121 exclusion from gain, you will have to prorate your exclusion amount.

Congress got wise to the people who operate a rental for years, then move in for two years and exclude all gain (up to $250,000 pr taxpayer) other than Sec 1250 depreciation.

Demolition costs get added to the LAND's basis. You still have to recapture depreciation that you took (or should have taken) on a structure you owned, even if it no longer exists.

When not? IRC 280B is pretty clear.

Occasionally there is grading or sewerage as part of a demolition and a land improvement asset could be added as part of the job.

With respect to a structure that no longer exists, this sounds like it at odds with Arthur's post in the other thread (unless I am still not getting it, which could very well be the case).

"Gil Faver" > recapture

You're not getting it.

You still have to recapture depreciation actually taken (or should have been taken). You DON'T further depreciate the structure that was replaced.

You still have to recapture depreciation on a structure that no longer exists? Based on Art's posts, and my reading of section 1250, that is incorrect.

Note: I did not say that one has to recapture it as 1250 property - but one does have to recapture it.

ok, as part of my ongoing education regarding depreciation recapture, how do you mean that such depreciation must be recaptured?

You must initially deal with this issue in the year the asset was disposed of.

"Recapture" can have a very precise meaning which doesn't necessarily apply here.

There are several ways to dispose of business-use property, which includes residential rentals. To wit: sale, abandonment, conversion to personal use, gift, casualty, exchange, and so on. Abandonment is not always cost-free, you frequently have to pay to get rid of something.

The amount of previously deducted depreciation that ends up included in income in the year of disposition can vary depending gain or loss recognized, gain or loss realized, and so on. I don't think there is a single general rule.

-Mark Bole

Actually, ALL of the depreciation taken should end up as income (unless the asset is being sold for less than its initial cost). The issue is how much of it ends up as ordinary income and how much as a capital gain. Remember that depreciation as it is taken lowers the adjusted basis. An asset that is demolished (real estate) ceases to generate a depreciation deduction (since it is "taken out of service"). Its adjusted basis gets added to the basis of the land along with the cost of demolition. Any deprecation on the demolished structure that is subject to recapture (ordinary income treatment) at that point in time (the demolition) is still subject to recapture when the property is eventually sold, along with any recapture caused by depreciation of the replacement structure.

"Any deprecation on the demolished structure that is subject to recapture (ordinary income treatment) at that point in time (the demolition) is still subject to recapture when the property is eventually sold"

it is this part that is confusing. According to Section 1250, that is not correct. Is there another code section that applies?

Let's say property was purchased for $200,000 (not including land).

it, you took $40,000 of depreciation. The land was valued at $100,000 when you bought the property. The property is used 100% for business.

Upon demolishing the property you have to recapture the $40,000 of depreciation, right? Suppose the act of demolishing costs $5,000.

On form 4797 for disposition of property, the cost basis is $200,000. The net proceeds is $0. The depreciation taken is $40,000. So the net profit is $(160,000), that is a loss of 160k.

The basis of the land is now increased by 5k to $105,000.

Is that about correct?

Or is it like this? The net gain on form 4797 is $0, but the basis of the land is now $100,000+$160,000=$260,000. The 5k of demolition cost is deductible expense.

The unrecaptured 1250 gain is the *lesser* of computed gain or depreciation taken (the latter reduced by any recaptured gain).

If the building was demolished, there was obviously no gain on its disposition. So I think the amount of prior depreciation that would be taxable is zero.

It's confusing that for business-use, personal-type property, undepreciated basis can be deducted upon abandonment (subject to nonrecaptured 1231 loss carryover), while for similar real-type property, the undepreciated basis is added to the basis of the land the property was previously attached to.

-Mark Bole

does have to recapture it.

What exactly do you mean by "recapture"? Are you saying that completely aside from the sale of the land with its adjusted basis, you have to make some other calculation in a current year for a structure that was demolished years ago?

-Mark Bole

I think that is right, except the demolition cost also is added to the basis of the land, not expensed. Contrary to what D. Stussy is saying, I don't think the $40K of properly claimed straight line depreciation ever shows up again on any tax form.

It doesn't make sense to me why real-type property is treated so drastically different from personal-type when both are business use, but I guess that's just the tax law.

-Mark Bole

does have to recapture it.

This is baby talk (or tech talk to imply knowledge) for "pay tax on now" - correct?

Are you saying that completely

I like the following quote from Paul Roberts and Brad Imsdahl in The Tax Book published by Tax Materials Inc.:

"Is it possible to recapture something that was never captured? If you think that's a tough question, how do you unrecapture something that cannot be recaptured in the first place? Yes, the people who write this stuff are serious. Imagine calling your neighbor and telling him his cows are in the cornfield. You'll be glad to help him capture his cows, for a fee of course. If a captured cow needs to be recaptured, you'll waive your fee. However, if you accidentally unrecapture any of his captured cows, your recapture fee will be set at a higher rate. As you and your neighbor argue terms, the cows find their own way back into the pasture. This has an analogy to taxpayer compliance issues, honest."

-Mark Bole

does have to recapture it.

You haven't read my [other] follow-up.

Instead of demolishing, if one were to sell, assume there is an amount that does need to be recaptured (as 1250 or other section property - 1250 isn't the only recapture section). Now just because one demolished the asset and transferred the adjusted basis to the land account doesn't mean that the depreciation that needed to be recaptured when the property was removed from service just disappears. It still needs to be carried and accounted for on a subsequent sale.

Recapture is necessary because one depreciated faster than straight-line.