recapturing depreciation on rental property

[fishnfool]

If you move into a current rental you own and continue to rent out part of the house (studio), is there any way around having to recapture all of your tax depreciation?

 

[unno2002]

[FONT=&quot]Can you cite where you note that recapture of depreciation is required on conversion from rental status to personal residence? In essence I only see it required on a sale.[/FONT]
[FONT=&quot]Publication 544 (2014), Sales and Other Dispositions of Assets[/FONT]

 

[fishnfool]

I was misinformed apparently. So it only applies to the sale of rental property as far as I can see. We don't plan on selling it for many years so the tax man can wait!

thanks for the link unno!

 

[fishnfool]

Found good info on nolo....Taxes in Converting Rental Property to Personal Residence | Nolo.com

Recapture of Depreciation Deductions

Converting a rental into your residence will not eliminate all taxes when you sell it. While the home was a rental, you should have claimed a depreciation deduction for it each year. The total amount of depreciation you claimed during the rental period is not eligible for the exclusion. Instead, you must "recapture" all your depreciation deductions--that is report them on IRS Schedule D and pay a flat 25% tax on these deductions. This can have a significant tax impact. In the example above, if Jane had taken $10,000 in depreciation deductions during the time she rented out the home, she would have to pay a deprecation recapture tax of $2,500 (25% x $10,000 = $2,500).
Ownership Taxes and Deductions

Once you occupy the home as your personal residence, you will no longer be able to take any of the deductions you took when the property was a rental. This means you will get no depreciation deduction and you can't deduct the cost of repairs. However, you will be entitled to the deductions provided to homeowners--that is, you may deduct a personal itemized deduction on IRS Schedule A the amount of your mortgage interest, mortgage insurance premiums, and even property taxes. The expenses must be prorated for the time the home was not considered a rental property.

 

[RetireBy90]

So if you were not allowed to deduct a deprecation due to income limits, does anyone know how this affects the recapture? Will you need to pay recapture even if you didn't get to deduct the depreciation?

 

[kaneohe]

So if you were not allowed to deduct a deprecation due to income limits, does anyone know how this affects the recapture? Will you need to pay recapture even if you didn't get to deduct the depreciation?

Is the depreciation deduction actually lost permanently or just deferred until you have enough income (or sell)? If the latter, I would imagine, you still need to pay the recapture since you didn't actually lose the deduction.

 

[RE2Boys]

So if you were not allowed to deduct a deprecation due to income limits, does anyone know how this affects the recapture? Will you need to pay recapture even if you didn't get to deduct the depreciation?

I'm not aware of any provision for not being allowed to deduct depreciation due to income.

Are you referring to the limitation on passive losses (such as from rental activities) offsetting ordinary income? That provision does have income limits. If not allowed to take the losses in a current year due to income restrictions, the losses are carry-forward until such time they can be used to offset passive gains or the property is sold.

 

[RetireBy90]

I'm not aware of any provision for not being allowed to deduct depreciation due to income.

Are you referring to the limitation on passive losses (such as from rental activities) offsetting ordinary income? That provision does have income limits. If not allowed to take the losses in a current year due to income restrictions, the losses are carry-forward until such time they can be used to offset passive gains or the property is sold.

That is probably the limitation. However, TT has filled out a $0.00 depreciation line 18 on schedule E for the 7 years we have had our current rental. Since I have never claimed a depreciation, will I still be required to pay a recapture on it ?

 

[kaneohe]

https://www.biggerpockets.com/renew...preciation-tax-mistakes-investors-need-avoid/

1. Depreciation is Not a Choice

Very often we come across taxpayers who either chose not to take depreciation (due to bad advice) or simply didn’t know they can take depreciation (again, due to bad advice).

It is important to know that depreciation is not a choice and if you are eligible to take it, you must take the tax write off. If your rental is eligible for depreciation but you choose not to take it or forget to take it, the IRS will still assume it has been taken and when your property is sold you may end up paying taxes on depreciation recapture that you never received a benefit for previously.

 

[fishnfool]

Good point.

Nobody gets around paying that 25% recapture tax even if they didn't depreciate their rental.

 

[Marc]

I thought living in a property for at least two of last five years made it so that you didn't have to pay capital gains on the house (assuming less than 250K/$500K) gain? If you have to recapture depreciation, what happens if house is worth less when you convert from rental to primary residence?

We bought our retirement home and now are renting out for one to two years.

Marc

 

[nwsteve]

If you are using TT and getting -0- depreciation, the rental property cost basis may have never been setup in TT for depreciation to be calculated. Each unit of property must be individually setup in TT to trigger the depreciation calc. For example, initial cost basis for the structure (no land) including date of acquisition, any major renovations (eg roof), major appliances that typically exceed 500, etc
If this setup was overlooked, you could still file amended returns for the last 3(?) years and claim those depreciation in those years.
Nwsteve

 

[Texas Proud]

Just a question on this.... isn't it excess depreciation that has to be recaptured I think there is no recapture if straight line...


Also, it says it is ordinary income... so why a 25% tax


Finally a comment.... if you read the rules it states depreciation allowed or allowable...

SOOO, if you took too much depreciation, you have to claim what you actually took.... if you took too little depreciation, you have to take what you legally could take....

 

[nwsteve]

Not an accountant, but my understanding is all depreciation allowable/taken is subject to "recapture" at time of sale.
The 25% rate is statutory for recaptured deprecation at time of sale. (it kinda like the govt says they let you write off and now want it back. If you did not take the write-off, oh too bad, pay up anyways).
Note accountant disclaimer but am a rental property owner it is the rule I have been told by my accountant applies--as least if I understood the instruction. ;-)
Nwsteve

 

[kaneohe]

Just a question on this.... isn't it excess depreciation that has to be recaptured I think there is no recapture if straight line...


Also, it says it is ordinary income... so why a 25% tax


Finally a comment.... if you read the rules it states depreciation allowed or allowable...

SOOO, if you took too much depreciation, you have to claim what you actually took.... if you took too little depreciation, you have to take what you legally could take....

this might be useful https://en.wikipedia.org/wiki/Depreciation_recapture
Sounds like recapture of st line depreciation is taxed at 25% max while recapture of excess depreciation (over/above st line) is taxed at ordinary income rates.

 

[Texas Proud]

Not an accountant, but my understanding is all depreciation allowable/taken is subject to "recapture" at time of sale.
The 25% rate is statutory for recaptured deprecation at time of sale. (it kinda like the govt says they let you write off and now want it back. If you did not take the write-off, oh too bad, pay up anyways).
Note accountant disclaimer but am a rental property owner it is the rule I have been told by my accountant applies--as least if I understood the instruction. ;-)
Nwsteve

this might be useful https://en.wikipedia.org/wiki/Depreciation_recapture
Sounds like recapture of st line depreciation is taxed at 25% max while recapture of excess depreciation (over/above st line) is taxed at ordinary income rates.

Thanks for the link....

Here is what I read.... RE is different... excess depreciation is taxed at ordinary income... SL depreciation is max taxed at 25%.... but not a statutory rate of 25%.... it could be lower.... here is the section in the link... my bold...

For Section 1250 assets (real estate), Recaptured Depreciation is defined as "Additional Depreciation" in IRS Publication 544 (see column 3 on page 30 of the 2010 version of this publication). Additional Depreciation is the portion of Accumulated Depreciation in excess of straight line. It is taxed at ordinary income tax rates, which have a maximum rate of 39.6% (to the extent of any gain realized). The portion of Accumulated Depreciation which corresponds to straight line depreciation is called "Unrecaptured Section 1250 Gain" (though sometimes informally called "Unrecaptured Depreciation", and it is taxed at a maximum rate of 25% (also to the extent of any gain realized). The remainder of any gain realized is considered long-term capital gain, provided the property was held over a year, and is taxed at a maximum rate of 15% for 2010-2012, and 20% for 2013 and thereafter.
​

 

[Texas Proud]

Just did a calculation with my sisters return.... she has a rental...

Put in a sale and there was zero recapture of depreciation... the gain was put in as long term cap gain on line 11 of Sch D....


So, as long as you were doing SL, it is a non-event....