Fully depreciated assets, cost basis, and sold rental properties?

[Dave Corfman]

I have a question on how to handle fully depreciated assets that are part of a rental property when it is sold.  I'm trying to estimate my taxes owed (long term capital gains and income) due to the sale.  I think this will be easiest with an example:

Suppose I have a rental house that I bought for $125,000, with $100,000 being depreciated and $25,000 being land.  I then buy a refrigerator for $1,000 during year 2 of ownership, and that refrigerator qualified for 100% bonus depreciation that year.  I sell the house after 5 years of ownership for $150,000.  I know that I need to recapture my depreciation on the $100,000 ($3,636 * 5 = $18,180) as regular income.  Do I also need to recapture the $1,000 of depreciation for my refrigerator as regular income?  And, is my cost basis $125,000 or $126,000 (or something else) when calculating my capital gain?

It seems like an asset past its "useful life" and fully depreciated should be treated as an expense at that point.  The bonus depreciation thing complicates things - my new refrigerator that qualified for bonus depreciation isn't *actually* past its useful life at year 1.  But, if I do hold a house long enough, I could easily have purchased and fully depreciated  multiple refrigerators - would I need to recapture all of them when I sell the house?

Thanks in advance.

[Todd Bednarz]

Yes depreciation recapture sucks.  IRS wants a piece of it back.

[Bill Brandt]

Your cost basis (for the 15% tax) is $126k after you pay regular federal income tax (25% cap) and state income tax on the $18,200 + $1,000. You almost got a 2 year interest free loan EXCEPT you’ll probably be in a higher tax bracket with the sale, so it actually cost you money to depreciate because your hold period was so short. 

If you used a cpa I think they let you down by not expensing it. If you did your own taxes, this is a teaching moment about how professionals can save you money. I believe you could have expensed this under the safe harbor rules saving yourself a couple hundred dollars.

Election to deduct, rather than depreciate, the value of low-priced items for your business, including appliances for a rental unit. Since 2016, the limit is $2,500 per item or invoice above the cost of many refrigerators, meaning you can elect to deduct the cost of a new fridge rather than depreciating it if that's better for your tax purposes.

[Julio Gonzalez]

@Dave Corfman Yes, unfortunately they would be subject to depreciation recapture. The only way the refrigerator wouldn't be is if you had previously retired the asset as retired assets aren't subject to depreciation recapture.