How does IRS assume depreciation when selling rental property

I read that if you don't take depreciation expense on a rental, IRS will assume you did when you sell the property. My question is how/why do they do this? How do they know under what circumstances the property was a rental. For example, it could have been a rental for only some years of it's life. Or it could have been a partial rental ( i.e rooms rented out ).
Reply to
faraz
wrote
Let's see. If you haven't broken to many laws already, there was rental income reported, now there is not. Someone might wonder what happened to the assets and initiate an audit. Schedule E should report the rental property address, so does the 1099 that reports the sales proceeds. Maybe someone cross checks those.
Of course, if you never reported the rental income in the first place there may be other issues to be worried about.
If you rented the property back in the 80's, 90's or 00's and haven't since, they might never know you didn't adjust the basis for depreciation on the asset sold. But do you want to take that chance?
The reality is that they depend on you to be truthful, the best you can anyway, in computing the basis of the asset sold and reporting it correctly. The only variable is, are you?
Reply to
paulthomascpa
Of course I am reporting the income , but if I neglect to claim depreciation some years, why would they assume I did when I have proof that shows I didn't?
Reply to
faraz
They don't assume you did. They don't care. The law says that you are to be treated as having taken depreciation, if you are allowed to do so, whether in fact you do or not.
___ Stu
formatting link
Reply to
Stuart A. Bronstein
Of course I am reporting the income , but if I neglect to claim depreciation some years, why would they assume I did when I have proof that shows I didn't? ===================Because depreciation is not optional but a mandatory deduction. Your choice or failure to claim it does not mean that when you sell the property that the amount of ordinary gain (i.e. depreciation recapture) should be different than had you claimed the proper amount.
The only discretion you have is to claim depreciation on an accelerated schedule (where permitted) vs. straight line.
Reply to
D. Stussy
In article ,
I disagree that depreciation is a mandatory deduction. But agree that upon sale the allowed or allowable depreciation amount must be recaptured.
Therefore it is unwise not to deduct depreciation.
This is about residential rental property, none of which allows for an accelerated method.
Reply to
Arthur Kamlet
In article ,
I disagree that depreciation is a mandatory deduction. But agree that upon sale the allowed or allowable depreciation amount must be recaptured.
Therefore it is unwise not to deduct depreciation.
This is about residential rental property, none of which allows for an accelerated method. ================== It is accelerated when compared to the AMT computation (27.5/31.5 years vs. 40).
Reply to
D. Stussy
On Nov 15, 10:25 pm, "D. Stussy" wrote:
It is not accelerated when compared to the maximum recovery period allowed for computing regular taxes which is all that is relevant to this discussion.
Reply to
Bill Brown

On Nov 15, 10:25 pm, "D. Stussy" wrote:
It is not accelerated when compared to the maximum recovery period allowed for computing regular taxes which is all that is relevant to this discussion. ================I disagree. Any method greater than straight-line for its first year is accelerated.
Reply to
D. Stussy
I don't understand what mandatory deduction means? What is the consequence of not taking this deduction? How is it enforced? I assume only an audit they would catch this. If I can show I never took the deduction, why would there be any problem?
Reply to
faraz
not taking this deduction? How is it enforced? I assume only an audit they would catch this. If I can show I never took the deduction, why would there be any problem?
Look at the instructions for completing line 2 of Form 4797, the form you use to report your sale. Note that it asks for the amount of depreciation "allowed or allowable since acquisition." Also note that the computation of the gain asks you to add that amount to the selling price before subtracting your cost basis. If you did not take your depreciation, you must include the amount that you could have taken. The IRS computer programs are programmed to look for certain reasonable amounts in that field when a sale is reported.
Reply to
Alan
I explained it to you before, but you apparently didn't believe what I said.
It's not actually a mandatory deduction - if you don't take it there is no penalty, and they don't make you recalculate your taxes with the deduction.
However when you later go to sell the property, they tax you as if you did take all the depreciation deductions you were entitled to, whether you actually took them or not. Will they discover it other than in an audit for something else? I don't know. This is the kind of thing their computers can be programmed to look for - whether they are or not would just be a guess on my part. Perhaps others here know better about that than I do.
___ Stu
formatting link
Reply to
Stuart A. Bronstein
This is what I do not understand. How can they know what depreciation deductions you were entitled to? In other words, how can they tax you on something you never claimed/reported.
Reply to
faraz
deductions you were entitled to? In other words, how can they tax you on something you never claimed/reported.
1. They do not know what you were entitled to. Therefore, they will make an assumption (usually the worse case possible for you) to arrive at the depreciation allowable but not taken. 2. They can tax you on it because that is what is written into the statute.
Reply to
Alan
In the USA taxes are self-assessed, so they may not automatically know. If you ever take depreciation on the property, or other deductions or income that allow them to realize you have real property you are not depreciating, they may figure it out from there.
But you are legally required to report recaptured depreciation when you sell the property, whether you took the depreciation in the first place or not. If the balance of income and deductions doesn't look right and they audit you, they will find it. And if they think you neglected to recapture knowing that you should have, the penalties could be severe, and you could (though not likely) end up in prison.
___ Stu
formatting link
Reply to
Stuart A. Bronstein
assume you did when you sell the property. My question is how/why do they do this? How do they know under what circumstances the property was a rental
You tell them.
Reply to
Bill Brown

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.