Depreciation recapture on improvements

8 Replies

I see tons of the same examples on depreciation recapture. My question is if i replace an appliance and depreciate it over 5 years does this need to be calculated into my depreciation recapture if i sell the property 30 years from now? All examples I've seen show that the irs will be assuming I'm taking depreciation on my property whether i take it or not.

if i replace windows, roof, flooring etc these expenses all add to the depreciation recapture I'll have to pay when i sell right? I am confused if the property is work 100k not land only building, and we depreciate it over 27.5 years that number will be a constant as I've seen in 200 examples. But if we depreciate improvements then that yearly depreciated value should be different every year and then the amount of depreciation recapture will be much bigger when you sell.

thanks??

@Reid Isaki these are all questions your accountant should be able to answer. The short answer is, yes, you have to recapture depreciation. You also will depreciate capital improvements along the way (roofs, windows, new kitchens, etc). Deciding to elect something as an expense versus a capital expense that you depreciate is where you need your tax professional. As you grow, don't be afraid to pay for good advice in this area!

@John Warren thank you for your reply! If I am missing something, depreciating something is never as good as writing it off as a repair, since even if you don't "use" all of your expenses to offset your gains it will roll over to the next year(s) and can continue to use that. I'm non active in my participation with rental activities.  I can only atest to my situation.  But yes, that's what I needed to know, everything that i'm depreciating against my property will be subject to depreciation recapture.  Even though I sought out a highly recommended yelp real estate tax cpa, I found that I was more knowledgeable in the current real estate tax laws(they are changing every month in california).  He was knowledgeable in the overall way of things that haven't changed for decades.  

@Reid Isaki  You are correct. We would always rather write off our expenses than capitalize and depreciate them. However the IRS is not too keen on letting that happen. Any major renovations must be capitalized and depreciated.

Have you considered utilizing a 1031 Exchange to avoid the recapture at sale? @Michael Skoczylas can assist you in that.

awesome thank you guys. To me there is only really one way out of not paying any depreciation recapture and that is death lol.  If i leave my home to my heirs and passaway with it in my possession they dont' pay any depreciation recapture OR capital gains tax, whatever the property is worth at the time of my death is the new basis for my heirs.

After searching the internet for 1031 exchange information(everyone seems to copy the same block of text from each other which adds to noise), I wasn't using the correct terminology. There are exchange excrows(the escrow company that will handle the proceeds of a 1031 exchange and use that money to purchase the like kindproperty) then there are exchange accomodators who will handle the paperwork of the sale/purchase.   Also there are the 1031 advisors who basically are there just to give you advice but won't actually do anything to help you or facilitate any of the sale. Please let me know if what I have is incorrect.

I know the gist of 45 day identification period and 180 day close, and 200% rule etc.. but when it comes down to the guts of actually doing a 1031 exchange I had a very hard time getting into the nuts and bolts of it.  Probably should have posted something in BP originally . Thanks everyone again for your help!!   

@Reid Isaki , LOL . I totally get the "cut and paste" of the 1031 industry - or actually any industry I spose.  But the single key to doing a 1031 is finding your intermediary before you close the sale of your old property.  They are your guide.  The 1031 exchange is going two miles deep into the two foot wide crick of the tax code.  So don't stress yourself trying to know the answers.  Know who to know who knows the answers for you.  That will be your QI.

Theres only 6 requirements you have to meet but if you don't meet them all your exchange will fail. But it's the strategy and opportunities inside those requirements that are your real gold.  And for the client the 1031 should be seamless and individual.  So hang in there.  it's intimidating but with a good QI the fear is more perception than reality!

 

Originally posted by @Reid Isaki :

I see tons of the same examples on depreciation recapture. My question is if i replace an appliance and depreciate it over 5 years does this need to be calculated into my depreciation recapture if i sell the property 30 years from now? All examples I've seen show that the irs will be assuming I'm taking depreciation on my property whether i take it or not.

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Depreciation recapture is only calculated on what you are selling. The five-year appliance depreciated separately from the dwelling structure and replaced several years ago is no longer an item in your depreciable assets and therefore not subject to recapture when you sell the dwelling structure 30 years later.



 

Thank you so much for your reply!!! Makes total sense!!

Originally posted by @Dave Toelkes :
Originally posted by @Reid Isaki:

I see tons of the same examples on depreciation recapture. My question is if i replace an appliance and depreciate it over 5 years does this need to be calculated into my depreciation recapture if i sell the property 30 years from now? All examples I've seen show that the irs will be assuming I'm taking depreciation on my property whether i take it or not.

--------------------------------- 




Depreciation recapture is only calculated on what you are selling. The five-year appliance depreciated separately from the dwelling structure and replaced several years ago is no longer an item in your depreciable assets and therefore not subject to recapture when you sell the dwelling structure 30 years later.