Depriciation Recapture and Long Term Gaines Calculations

[Rawn Wilson]

I bought a house in 2003 and lived there 3 years.  When I deployed to Iraq in 2006, I rented it out and have been renting ever since.  I was new to real estate and did not depreciate it until recently (maybe past 4 years).  It is time to sell and think I have the tax stuff figured out.  Can anyone help confirm my thinking:

1.  Bought the house for 132,000.  Paid 3,000 in closing costs. Invested 15,000 in roof, kitchen, and bathroom upgrades.  So it becomes a Cost Basis of 150,000

2. Selling for 190,000.  Paying 5% commission (9,500). Selling basis is now 180,500.

3. Even though I just started to depreciate, I understand I have to claim what COULD have been claimed.  So 12 years of rental history at about 4,800/ mo = 57,600 of depreciation.  This brings my NEW cost basis to 74,400.

4. My gains are now 180,500-74,400 = 106,100

5.  I will be responsible for Recapture tax of 57,600 at 25% rate and long term capital gains tax on 48,500 at 15% rate.

Does this sound correct?

[Natalie Kolodij]

Originally posted by @Rawn Wilson:

I bought a house in 2003 and lived there 3 years.  When I deployed to Iraq in 2006, I rented it out and have been renting ever since.  I was new to real estate and did not depreciate it until recently (maybe past 4 years).  It is time to sell and think I have the tax stuff figured out.  Can anyone help confirm my thinking:

1.  Bought the house for 132,000.  Paid 3,000 in closing costs. Invested 15,000 in roof, kitchen, and bathroom upgrades.  So it becomes a Cost Basis of 150,000

2. Selling for 190,000.  Paying 5% commission (9,500). Selling basis is now 180,500.

3. Even though I just started to depreciate, I understand I have to claim what COULD have been claimed.  So 12 years of rental history at about 4,800/ mo = 57,600 of depreciation.  This brings my NEW cost basis to 74,400.

4. My gains are now 180,500-74,400 = 106,100

5.  I will be responsible for Recapture tax of 57,600 at 25% rate and long term capital gains tax on 48,500 at 15% rate.

Does this sound correct?

Okay we have a few main items here. 

1. Not depreciating it the whole time. You need to have a tax professional file a form 3115 to claim that missed depreciation. You're going to pay tax on it as though you took it....you want the benefit too! It will be used to offset your gain too. 

2. Cost basis will be the LOWER of the purchase price or FMV at time it was converted to a rental in 2006. Need to confirm this. And make sure the allocation for building and land was correct.

3. Selling for $190,000 - Comission = $180,500= correct this will be the Sale price used to calculate gain. 

4.Assuming the amount of $4800 annually is correct, then $57,600 of your gain will be taxed at ordinary income tax rates, up to 25%- the balance at long term capital gain rates. 

I can stress this enough- GET A PROFESSIONAL. We can make the proper adjustment  (the 3115 is a helluva form, not suggested for any one not a pro) 

If we claim that missed depreciation of $4700 *8 ish years that were missed = that's a $38,400 expense adjustment we can take in the year you sell which will help offset that gain. 

Feel free to reach out if you have more questions.