My daughter got married in 2006 and began renting her previous house in November. I reported this rental income on Schedule E. I chose not to report depreciation on the ground that we would have to report recapture when she sells the house, probably within a year or two. But I ran across something in TurboTax which told me that depreciation is REQUIRED by the IRS. This doesn't make sense -- but then, a lot in the tax law doesn't make sense. Advice, please.
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Recapture in the US is incurred on depreciation allowed or allowable, whether or not it was taken. You are thinking of Canadian recapture. You would be better off amending last year's return.
"Ray" wrote
You'll still compute the gain on the sale based on the depreciation you *should* have taken - so take it. This may mean you have to file amended returns to claim the depreciation.
-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net
And when she does you'll learn that the recapture applies to depreciation allowed OR allowable. IOW, she'll be taxed on the depreciation whether she claims it or not. You need to amend.
-- Phil Marti Clarksburg, MD
Claim the depreciation. Don't be lazy. If you don't, you'll kick yourself.
You're not really required to claim the depreciation. But if you don't you will still be required to recapture the depreciation that you could have taken when you eventually sell. Stu
You have to do that whether or not your claim depreciation. Your basis in the property is reduced by *allowable* depreciation whether or not you claim it.
So by not claiming it you're shooting yourself in the foot (or the wallet :).
-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us
First it isn't the IRS it is the United States Congress which requires basis to be reduced by depreciation allowed or allowable. In other words, basis goes down whether depreciation is deducted or not.
Your daughter should deduct the depreciation she is entitled to.
Yes, the depreciation to be subtracted from basis is allowed or allowable. But I also agree with Ray, this is perhaps a silly part of the tax code. The taxpayer is seeking to do something for the sake of simplicity that will most likely result in him or her paying missing out on a net tax savings. He or she should be so permitted. This should be the choice of the taxpayer. Now, whether depreciation saves money may hinge on tax bracket. Let me explain. Instead of the usual 15% capital gains rate, depreciation recapture has a 25% capital gains rate. Now, that will effect a net savings if you are in a higher tax bracket (not to mention the time value of money). But what if you are in the 25% bracket? Or, what if you're in the 15% tax bracket, is depreciation recapture still taxed at 25%? I suspect the answer is No, but I don't know for sure.
-Doug
Doug wrote: [...]
25% is a *maximum* tax rate for unrecaptured section 1250 gain. The lower of 25% or your ordinary tax rate applies.-Mark Bole
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