Property Disposition

Jan 17, 2012 4 Replies
D

We purchased a home in 1973 for $36,500 and converted it to a rental property in 1979. By 2004 the mortgage had been paid off and the property was completely depreciated.



In 2005, the ownership of the property management company we used changed hands and things started to go downhill. In early 2011 we discovered that numerous needed repairs had not been made and the property had been allowed to seriously deteriorate to the point where its FMV was less than what we paid in 1973. Given the prospect of a very large repair bill (50K+)and a realtor's very low estimate of market value in its as-is condition (not to mention the uncertainty of being able to find a buyer) we decided to donate the property to a local charity (501c3 certified).



Because the deprecation taken over the years exceeded the current fair market value, my understanding is that we would not be able to claim a charitable deduction for the contribution.



I don't have a problem with that, but wonder if there are any forms I need to fill out to document the disposition of the property?



Regards, Dan


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A

Yes, you file form 4797. one of the mostt deceptively simple looking but difficult forms there is.

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R

Use form 4797 to report disposition of property.

However you can only depreciate property, not land, so I imagine you depreciated some amount like $20,000. It would good to have an appraisal done for the FMV of the land and the house.

I think the house is disposed of at FMV on 4797, and then deduction for FMV taken on Schedule A.

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D

Yes, the land value ($4,500) of the original purchase price was not depreciated. And I hadn't thought of that with regards to the value of the contribution.

Regards, Dan

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R

Or maybe the property is disposed of for $0 on 4797, resulting in a loss because the land was not depreciated, and no deduction on Schedule A.

There is a difference. Taking a loss on 4797 makes the loss ordinary, deducting your W-2 income, pension income, etc. But taking a charitable contribution on Schedule A has less benefit -- say the loss was 4k and you have no itemized deductions, then taking a charitable contribution of 4k means nothing as standard deduction is more (something like 6k I think), or if your loss was 7k you get to deduct this 7k as an itemized deduction, but it is only 1k more than the standard deduction so it's as if 6k were loss. Also taking loss on

4797 lets you reduce your AGI, which increases medical expense deduction (the amount above 7.5% of your AGI is deductible), makes adoption credit more, less AMT phaseout, etc.

So I'm not sure how exactly to report this thing.

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