Depreciation Expense

[SD Realtor]

FSD or 4plex –

Just wanting to check with you guys on something as I am not as adept with tax issues on rentals as I would like to be. I had a client ask me about a capital gains issue on his rental. He is selling it and using some (cap gain) losses he is carrying forward from a few years ago to offset the gains on the sale. I told him that first off he needs to talk to his CPA about that but in general I think he will be able to offset his gains on the sale on the loss he is carrying forward. Note this loss was due to equities several years ago. HOWEVER…. I did warn him that recaptured depreciation (in my opinion) CANNOT be offset by the loss he is carrying forward.

Anyways I am interested to hear your opinions (or anyone elses), and as I said to him, his question needs to be submitted to his CPA.

[4plexowner]

Too many details for me – I turned my taxes over to my CPA when my return grew beyond 12 pages

If he is anywhere close to income levels that bring AMT into play his CPA needs to consider the AMT ramifications of any equity recapture

Choosing to close in 2008 vs 2007 gives him more time to plan his tax strategies

Easy question for a tax specialist: can a carry forward loss from equities be applied against capital gains from real estate?

Get this guy to his CPA quick with some real numbers to crunch!

[(former)FormerSanDiegan]

This is a tricky one. Some general guidance below, but I also recommend getting a tax advisor to crunch the numbers for your exact situation. It’s been over 5 years since I sold a rental.
Plus there may be other factors, such as phase outs, AMT, etc that come into play. Also, note that some rules were changed over the years. If this has been a rental longer than about 10 years there may be substantial differences in depreciation rules, etc that were grandfathered into the law.

First, the basics …
Capital Gain on the property is:
Sales price minus the following:
a) selling costs, including commission, etc
b) Cost Basis

Cost Basis is the original cost of the property, plus any improvements, minus depreciation.

The tax on the gain is then split into two parts: Depreciation recapture and capital gains. The amount of the gain that is due to depreciation recapture is taxed as ordinary income up to a maximum rate (I believe it is 25%, used to be 28%). The capital gains is taxed at cap gains tax rates (typically 15% for long-term gain).

The issue of offsetting capital gains with capital losses is straightforward for the capital gains on property. He can apply this against other capital losses. Since the portion that is due to depreciation recapture is technically considered ordinary income I am fairly certain that he cannot use this to offset capital losses.

[SD Realtor]

Thanks guys –

FSD are you sure you are not an accountant in sheeps clothing? Damn you nailed it… I am actually surprised as I got it correct as well but did not know what rate the depreciation recapture would be taxed at but it makes sense that it is ordinary income and it makes absolute sense that it cannot be offset by carry forward cap gains loss.

Great help and yes he is working with his cpa of course.

SD Realtor

[(former)FormerSanDiegan]

No I’m not an accountant … but I occasionally find errors in my accountant’s paperwork.

[kismetsdad]

Nolo publishes a book titled “Every Landlords Tax Deduction Guide” It is over 450 pages of well written tax advise covering almost all aspects of landlord tax issues. They publish dozens of plain English legal books.

Disclosure: I am not an employee or shareholder of Nolo.com

[kismetsdad]

Nolo publishes a book titled “Every Landlords Tax Deduction Guide” It is over 450 pages of well written tax advise covering almost all aspects of landlord tax issues. They publish dozens of plain English legal books.

Disclosure: I am not an employee or shareholder of Nolo.com

[kismetsdad]

Nolo publishes a book titled “Every Landlords Tax Deduction Guide” It is over 450 pages of well written tax advise covering almost all aspects of landlord tax issues. They publish dozens of plain English legal books.

Disclosure: I am not an employee or shareholder of Nolo.com

[kismetsdad]

Nolo publishes a book titled “Every Landlords Tax Deduction Guide” It is over 450 pages of well written tax advise covering almost all aspects of landlord tax issues. They publish dozens of plain English legal books.

Disclosure: I am not an employee or shareholder of Nolo.com

[kismetsdad]

Nolo publishes a book titled “Every Landlords Tax Deduction Guide” It is over 450 pages of well written tax advise covering almost all aspects of landlord tax issues. They publish dozens of plain English legal books.

Disclosure: I am not an employee or shareholder of Nolo.com

[(former)FormerSanDiegan]

No I’m not an accountant … but I occasionally find errors in my accountant’s paperwork.

[(former)FormerSanDiegan]

No I’m not an accountant … but I occasionally find errors in my accountant’s paperwork.

[(former)FormerSanDiegan]

No I’m not an accountant … but I occasionally find errors in my accountant’s paperwork.

[(former)FormerSanDiegan]

No I’m not an accountant … but I occasionally find errors in my accountant’s paperwork.

[SD Realtor]

Thanks guys –

FSD are you sure you are not an accountant in sheeps clothing? Damn you nailed it… I am actually surprised as I got it correct as well but did not know what rate the depreciation recapture would be taxed at but it makes sense that it is ordinary income and it makes absolute sense that it cannot be offset by carry forward cap gains loss.

Great help and yes he is working with his cpa of course.

SD Realtor

[SD Realtor]

Thanks guys –

FSD are you sure you are not an accountant in sheeps clothing? Damn you nailed it… I am actually surprised as I got it correct as well but did not know what rate the depreciation recapture would be taxed at but it makes sense that it is ordinary income and it makes absolute sense that it cannot be offset by carry forward cap gains loss.

Great help and yes he is working with his cpa of course.

SD Realtor

[SD Realtor]

Thanks guys –

FSD are you sure you are not an accountant in sheeps clothing? Damn you nailed it… I am actually surprised as I got it correct as well but did not know what rate the depreciation recapture would be taxed at but it makes sense that it is ordinary income and it makes absolute sense that it cannot be offset by carry forward cap gains loss.

Great help and yes he is working with his cpa of course.

SD Realtor

[SD Realtor]

Thanks guys –

FSD are you sure you are not an accountant in sheeps clothing? Damn you nailed it… I am actually surprised as I got it correct as well but did not know what rate the depreciation recapture would be taxed at but it makes sense that it is ordinary income and it makes absolute sense that it cannot be offset by carry forward cap gains loss.

Great help and yes he is working with his cpa of course.

SD Realtor

[(former)FormerSanDiegan]

This is a tricky one. Some general guidance below, but I also recommend getting a tax advisor to crunch the numbers for your exact situation. It’s been over 5 years since I sold a rental.
Plus there may be other factors, such as phase outs, AMT, etc that come into play. Also, note that some rules were changed over the years. If this has been a rental longer than about 10 years there may be substantial differences in depreciation rules, etc that were grandfathered into the law.

First, the basics …
Capital Gain on the property is:
Sales price minus the following:
a) selling costs, including commission, etc
b) Cost Basis

Cost Basis is the original cost of the property, plus any improvements, minus depreciation.

The tax on the gain is then split into two parts: Depreciation recapture and capital gains. The amount of the gain that is due to depreciation recapture is taxed as ordinary income up to a maximum rate (I believe it is 25%, used to be 28%). The capital gains is taxed at cap gains tax rates (typically 15% for long-term gain).

The issue of offsetting capital gains with capital losses is straightforward for the capital gains on property. He can apply this against other capital losses. Since the portion that is due to depreciation recapture is technically considered ordinary income I am fairly certain that he cannot use this to offset capital losses.

[(former)FormerSanDiegan]

This is a tricky one. Some general guidance below, but I also recommend getting a tax advisor to crunch the numbers for your exact situation. It’s been over 5 years since I sold a rental.
Plus there may be other factors, such as phase outs, AMT, etc that come into play. Also, note that some rules were changed over the years. If this has been a rental longer than about 10 years there may be substantial differences in depreciation rules, etc that were grandfathered into the law.

First, the basics …
Capital Gain on the property is:
Sales price minus the following:
a) selling costs, including commission, etc
b) Cost Basis

Cost Basis is the original cost of the property, plus any improvements, minus depreciation.

The tax on the gain is then split into two parts: Depreciation recapture and capital gains. The amount of the gain that is due to depreciation recapture is taxed as ordinary income up to a maximum rate (I believe it is 25%, used to be 28%). The capital gains is taxed at cap gains tax rates (typically 15% for long-term gain).

The issue of offsetting capital gains with capital losses is straightforward for the capital gains on property. He can apply this against other capital losses. Since the portion that is due to depreciation recapture is technically considered ordinary income I am fairly certain that he cannot use this to offset capital losses.

[(former)FormerSanDiegan]

This is a tricky one. Some general guidance below, but I also recommend getting a tax advisor to crunch the numbers for your exact situation. It’s been over 5 years since I sold a rental.
Plus there may be other factors, such as phase outs, AMT, etc that come into play. Also, note that some rules were changed over the years. If this has been a rental longer than about 10 years there may be substantial differences in depreciation rules, etc that were grandfathered into the law.

First, the basics …
Capital Gain on the property is:
Sales price minus the following:
a) selling costs, including commission, etc
b) Cost Basis

Cost Basis is the original cost of the property, plus any improvements, minus depreciation.

The tax on the gain is then split into two parts: Depreciation recapture and capital gains. The amount of the gain that is due to depreciation recapture is taxed as ordinary income up to a maximum rate (I believe it is 25%, used to be 28%). The capital gains is taxed at cap gains tax rates (typically 15% for long-term gain).

The issue of offsetting capital gains with capital losses is straightforward for the capital gains on property. He can apply this against other capital losses. Since the portion that is due to depreciation recapture is technically considered ordinary income I am fairly certain that he cannot use this to offset capital losses.

[(former)FormerSanDiegan]

This is a tricky one. Some general guidance below, but I also recommend getting a tax advisor to crunch the numbers for your exact situation. It’s been over 5 years since I sold a rental.
Plus there may be other factors, such as phase outs, AMT, etc that come into play. Also, note that some rules were changed over the years. If this has been a rental longer than about 10 years there may be substantial differences in depreciation rules, etc that were grandfathered into the law.

First, the basics …
Capital Gain on the property is:
Sales price minus the following:
a) selling costs, including commission, etc
b) Cost Basis

Cost Basis is the original cost of the property, plus any improvements, minus depreciation.

The tax on the gain is then split into two parts: Depreciation recapture and capital gains. The amount of the gain that is due to depreciation recapture is taxed as ordinary income up to a maximum rate (I believe it is 25%, used to be 28%). The capital gains is taxed at cap gains tax rates (typically 15% for long-term gain).

The issue of offsetting capital gains with capital losses is straightforward for the capital gains on property. He can apply this against other capital losses. Since the portion that is due to depreciation recapture is technically considered ordinary income I am fairly certain that he cannot use this to offset capital losses.

[4plexowner]

Too many details for me – I turned my taxes over to my CPA when my return grew beyond 12 pages

If he is anywhere close to income levels that bring AMT into play his CPA needs to consider the AMT ramifications of any equity recapture

Choosing to close in 2008 vs 2007 gives him more time to plan his tax strategies

Easy question for a tax specialist: can a carry forward loss from equities be applied against capital gains from real estate?

Get this guy to his CPA quick with some real numbers to crunch!

[4plexowner]

Too many details for me – I turned my taxes over to my CPA when my return grew beyond 12 pages

If he is anywhere close to income levels that bring AMT into play his CPA needs to consider the AMT ramifications of any equity recapture

Choosing to close in 2008 vs 2007 gives him more time to plan his tax strategies

Easy question for a tax specialist: can a carry forward loss from equities be applied against capital gains from real estate?

Get this guy to his CPA quick with some real numbers to crunch!

[4plexowner]

Too many details for me – I turned my taxes over to my CPA when my return grew beyond 12 pages

If he is anywhere close to income levels that bring AMT into play his CPA needs to consider the AMT ramifications of any equity recapture

Choosing to close in 2008 vs 2007 gives him more time to plan his tax strategies

Easy question for a tax specialist: can a carry forward loss from equities be applied against capital gains from real estate?

Get this guy to his CPA quick with some real numbers to crunch!

[4plexowner]

Too many details for me – I turned my taxes over to my CPA when my return grew beyond 12 pages

If he is anywhere close to income levels that bring AMT into play his CPA needs to consider the AMT ramifications of any equity recapture

Choosing to close in 2008 vs 2007 gives him more time to plan his tax strategies

Easy question for a tax specialist: can a carry forward loss from equities be applied against capital gains from real estate?

Get this guy to his CPA quick with some real numbers to crunch!

[Author]

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