Rental Property Depreciation Questions

I have two residential rental properties that have been in service beginning in the 2000 tax year and have a few questions about three types of depreciation and recapture.

I understand that replacing a roof needs to be depreciated at the 27.5 year rate and will need to be recaptured when the property is sold even if the roof is no longer in service. Is that correct?

A fence will be depreciated at the 15 year rate. Is that correct and will it need to be recaptured when sold?

Lastly, replacing an appliance calls for a 5 year depreciation. is that correct and will it need to be recaptured when the rental property is sold?

David

Reply to
David
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depending on the nature of the roof work, it may very well be an expensable repair.

I am interested in the answer to this question as well (assuming the roof or other item is depreciated, not expensed, and is no longer in service when the property is sold).

Reply to
Gil Faver

In article , Gil Faver

Reply to
Arthur Kamlet

Let me ask it this way. I own a property, and I do a roof replacement that is so extensive that it needs to be depreciated, not expensed. I own the building long enough that the depreciation is fully realized, and then I perform another roof replacement. I then sell the property. Do I need to recapture the depreciation for the first, fully used up roof? That section

1250 property no longer exists, and is not part of the sale. No part of the gain can possibly be attributed to the first roof.
Reply to
Gil Faver

That's what makes life interesting.

It cancels out.

The recaptured depreciation goes to reduce basis. But when the old new roof got added, the basis of the property increased.

So if you paid $20,000 for the old new roof, and it's been depreciated fully, your Sec 1250 property basis has been increased along the way by $20,000 and through depreciation recapture its basis will now be reduced by 20,000 and all the paperwork and asset schedules balance and are accounted for.

But yes, I like to have all the ducks lined up and accounted for, so I would not let the old new roof fly away.

Reply to
Arthur Kamlet

So you seem to be saying that there will not need to be a recapture on a five year depreciated appliance as it is declining in value as rapid as one takes the depreciation. So can the same case be made in regards to roofing and wood fencing as there normal life is no more than the

27.5 and 15 years respectively. Here in the northwest wood fences are almost always rotted and falling down by fifteen years and I have yet to get 27.5 years from an asphalt roof and many are only rated for 25 which here rarely last the expected life. So it seems there would not be any allocation at the time of sale as the actual roof and fencing are truly depreciating in value as rapidly as one takes the depreciation.

David

Reply to
David

Would someone please define "recapture", in the context it's being used in this thread...?

Reply to
LoTax

If you sell property for, say, $300,000, yopu have to allocate that among each asset class.

The building and capital improvements to the building would be an asset class. The land another. The small stuff, appliances, another.

You would not need to or benefit much from fine tuning the sales price allocation within each class. But you can, though at the end of the day you need a major chunk of that 300,000 allocated to the building and its improvements. Land would cover just about all the rest.

So you need a reasonable method to allocate sales price, and when you are done, the allocated sales prices add up to the actual sales price.

Reply to
Arthur Kamlet

Form 4797 line 22 :^)

Reply to
Arthur Kamlet

Reply to
D. Stussy

"Gil Faver"

Reply to
D. Stussy

Seems to me that line 22 is simply any depreciation that's been allowed or allowable, and that it pretty much *always* reduces basis, which is the only thing line 22 is about.

"Recapture" just *has to be* something else... :-O

Has this entire thread been about whether or not depreciation reduces basis...???

Reply to
LoTax

,

You're asking the wrong question. It's not about recapture, it's about taxation of previously unrecaptured amounts.

-Mark Bole

Reply to
Mark Bole

Reply to
Gil Faver

I like the concept that it cancels out, but I am not quite following. Of course, I haven't pulled out the forms and tried to work through them, either. But, let's say you purchase a property for $1,000,000. Over the course of time you add a capital improvement (not getting into what a roof "replacement" involves here!) that costs $20,000. Your basis is now $1,020,000. You fully depreciate the capital improvement (and the capital improvement vanishes), so your basis is now $1,000,000. Along the way, you took other depreciation in the amount of $70,000. Your adjusted basis is $930,000. You sell the property for $1,500,000. Your gain is $570,000. But, you have depreciation recapture to take into consideration, so some of your gain will be treated as recapture, not gain. You will recapture the $70,000 of the "other depreciation". Will you not also recapture the $20,000 for the capital improvement? Or are you saying you will allocate zero of the sales proceeds to this no-longer-existing capital improvement, and thus there is no recapture for this capital improvement?

Reply to
Gil Faver

Unrecaptured Sec 1250 gain pretty much no longer exists. That's because it applies only to the difference between accelerated depreciation before 1976 and straight line. Since it's more than 31 years and by now pretty much all such properties are either fully depreciated or the straight line is at least as much as the accelerated amount, no one will be finding unrecaptured S 1250 any longer.

Sec 1250 recapture on the other hand it just the portion of gain on 1250 property attributable to depreciation. the property could have been owned and depreciated only 5 years for example, and you will still be recapturing gain due to depreciation on Sec 1250 property.

Reply to
Arthur Kamlet

In article , Gil Faver > depreciated fully, your Sec 1250 property basis has been increased

Don;t make too much work for yeurself here.

As I said a few times, do the allocation by asset class/class life.

So all Section 1250 27.5 yr property should be lumped together when allocating the portion of sales price atributable to that property. Old roof/new roof/deck/porch, simply is too fine detail to worry about.

Sec 1231 property - pimarily the land itself, will have a portion of the sales price allocated to it.

Sec 1245 is sometimes the pain in the neck nickel & dime stuff, and if over 5 years it is reasonable to allocate none of the sales price to Sec 1245 completely depreciated property. Or if it is partially depreciated, use the remaining adjusted cost basis for all 1245 property as a good estimate of the sales price allocated to 1245.

I've heard of tax professionals fretting over the FMV of appliances at time of sale because they know an allocation will have to be made. I've tried to say here that you can make the 1245 gain to come out to be zero, using the very reasonable depreciated cost basis as sales price. Nothing difficult at all.

Reply to
Arthur Kamlet

Art, I think you've got the two "recapture" definitions reversed... Will you consider this?

And line 22 isn't either of these, best I can recall.

Reply to
LoTax

I certainly like that concept, but I think it is too late . . .

so, if the building is demolished before sale, there is no portion of the sales price attributable to 1250 property, and thus no recapture?

Likewise, if the purchaser promptly tears down the existing structure, the purchaser is paying only for the land, and thus no recapture?

And, if the 1250 property has a value of not more than its remaining basis, no recapture?

And, to the extent the 1250 property has REALLY lost value (depreciation actually has some basis in fact), that will reduce the amount of recapture that might otherwise occur if the 1250 property maintained its original value or appreciated?

Art, thanks. This discussion has been most enlightening. I hope I remember it when the time comes. Of course, who knows what the tax laws will be then.

Reply to
Gil Faver

In article , Gil Faver And, to the extent the 1250 property has REALLY lost value (depreciation

Could be. If no gain, then no recapture of depreciation.

One more comment to LoTax: I thought I had the unrecatured 1250 and the

1250 recapture right, but I can be convinced they are switched.
Reply to
Arthur Kamlet

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