Discussion:Tax benefit rule/depreciation recapture
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| {{ForumReplyPost|UserID=Fsteincpa|Date=22 October 2009|Text=Reason? Reason? Oh, you mean kind of like when you try to talk to a woman <see Nat, you said you were happy I was back, now I need to run again>}} | {{ForumReplyPost|UserID=Fsteincpa|Date=22 October 2009|Text=Reason? Reason? Oh, you mean kind of like when you try to talk to a woman <see Nat, you said you were happy I was back, now I need to run again>}} | ||
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| + | {{ForumReplyPost|UserID=Seaside CPA|Date=22 October 2009|Text=The way I see all of this is that when you are calculating the adjusted basis in the property, the basis must be reduced by the "allowable" depreciation. Once you have this number, you calculate the gain. From the gain, you must recognize the amount of depreciation actually taken as unrecaptured Section 1250 gain. The remainder of the gain would fall under the Section 121 gain exclusion rules. This is without researching in detail, so please feel free to poke holes in my theory.}} | ||
Revision as of 16:48, 22 October 2009
Discussion Forum Index --> Advanced Tax Questions --> Tax benefit rule/depreciation recapture
Discussion Forum Index --> Tax Questions --> Tax benefit rule/depreciation recapture
| 21 October 2009 | |
| An individual taxpayer sells their primary residence that they have been using partly as a home office in previous post- 1997 years. In some of those years due to modest income, taxpayer derived no tax benefit from the depreciation deduction. Taxpayer then sells property and calculated gain does not exceed $250,000 exclusion. However, taxpayer has taken significant depreciation as partial home office for past eight years. Can taxpayer exclude the recognition of an appropriate portion of the depreciation recapture under IRC 1250 in light of tax benefit rule (IRC 111)? | |
| 21 October 2009 | |
| simplifying the question: if a taxpayer didn't save taxes based on depreciation taken, does the depreciation need to be taken into account as recaptured/unrecaptured gain when the asset is sold?
YES, it does, therefore NO you can't use the tax benefit rule | |
Death&Taxes (talk|edits) said: | 21 October 2009 |
| But note that the gain on the sale from that depreciation could be used to compute the allowable home office deduction this year by including it in the profit. | |
Harry Boscoe (talk|edits) said: | 21 October 2009 |
| Did the taxpayer "derive no benefit" in his The answer to your question - a very good question - will depend on which of these is the case. And here's a kicker: *both* of them might apply. Stay tuned while Kevin starts backpedaling... | |
| 22 October 2009 | |
| This may not be too harsh.
In general, the gain you cannot treat as tax free is equal to the applicable depreciation after 1997. This would be Sch D capital gain, not taxed as ordinary income and no recapture of any SE tax you saved from the deduction. Any carryover office in home deductions may be allowed in the year of disposition. | |
| 22 October 2009 | |
| The sale of a home containing a home office was much more complex before the change in year 2002. Prior to that we had to allocate the sale to two assets: the residence and the home office. Allocation was in the same proportion you used to figure the depreciation. Reportable gain on the home office was potentially larger than the current method. The change was more taxpayer friendly.
If the home office is a totally separate structure from the residence, you must still allocate this as a sale of two separate properties. | |
| 22 October 2009 | |
| I'm really glad this has come up.
Here's a quote from Pub 587, in the chapter "Sale or Exchange of Your Home" that has puzzled me: "Depreciation - If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain equal to any depreciation you deducted (or could have deducted) for periods after May 6, 1997. This means that when figuring the amount of gain you can exclude, you must reduce the total gain by any depreciation allowed or allowable on the part of your home used for business after May 6, 1997. If you can show by adequate records or other evidence that the depreciation you actually deducted (the allowed depreciation) was less than the amount you were entitled to deduct (the allowable depreciation), the amount you cannot exclude (and must subtract from your total gain when figuring your exclusion) is the amount you actually deducted." Any thoughts? | |
| 22 October 2009 | |
| I hadn't noticed that. So they are saying if we have records to back it up the recapture is only for actual depreciation taken instead of "allowable"? | |
| 22 October 2009 | |
| Oops finished that post too quickly. I would not advise skipping depreciation based on that. You still come out ahead with a deduction at ordinary tax rates that reduces income subject to SE taxes VS a recapture of the same amount at capital gains rates in a later year. | |
| 22 October 2009 | |
| I believe that issue has to do with the parts of the 'business use of home' 8829 expenses that are allowable to create a Sch C loss vs those that carry over and cannot create a loss. | |
| 22 October 2009 | |
| (the unrecaptured §1250 gain is taxed at up to 25%, not the regular cap gains rate - again just a reminder) | |
Harry Boscoe (talk|edits) said: | 22 October 2009 |
| (1) There should be no "depreciation recapture" involved here. What it is is a "disallowed exclusion" under Section 121.
(2) Did the taxpayer "derive no benefit" (in those modest income years) because he wasn't allowed to deduct some or all of the depreciation on his home office because of the statutory limits (see IRC Section 280A(c)(5)) on home office deductions? | |
Harry Boscoe (talk|edits) said: | 22 October 2009 |
| And no, the exception to the usual "allowed or allowable" depreciation *isn't* related to the Section 280A limits on Form 8829 that create a carryover when there's a limitation on the deduction for home office expenses. It's "a whole n'other thing."
The exception to allowed or allowable is in the Code. All you CodeHeads here should know about it. | |
Death&Taxes (talk|edits) said: | 22 October 2009 |
| I stand by my comment, Harry, which has nothing to do with benefit, but rather concerns depreciation that was deducted. If there is still a home office for the year of sale, the amount reflected on Sch D and taxed at 25% is also used as income from business to compute the allowable home office deduction for the year of sale.
In that sense it stands to reason that you would eliminate any depreciation where there was no benefit, since its inclusion would increase the current year 280A deduction, and reduce SE tax in a Sch C situation. | |
Harry Boscoe (talk|edits) said: | 22 October 2009 |
| I didn't say that that taxable gain on the house couldn't be used to allow a larger home office deduction in the year of sale of the house, now did I?
"...it stands to reason that you would eliminate any depreciation where there was no benefit..." "It stands to reason..."??!?? You forget so easily: we are dealing with the Tax Code here. "Reason" is nowhere to be found. According to Code Section 121(d)(6) "Recognition of gain attributable to depreciation - Subsection (a) shall not apply to so much of the gain from the sale of any property as does not exceed the portion of the depreciation adjustments (as defined in section 1250(b)(3)) attributable to periods after May 6, 1997, in respect of such property." You should read the definition of "depreciation adjustments" in Code Section 1250(b)(3). Your mouth will drop open. | |
| 22 October 2009 | |
| Reason? Reason? Oh, you mean kind of like when you try to talk to a woman <see Nat, you said you were happy I was back, now I need to run again> | |
Seaside CPA (talk|edits) said: | 22 October 2009 |
| The way I see all of this is that when you are calculating the adjusted basis in the property, the basis must be reduced by the "allowable" depreciation. Once you have this number, you calculate the gain. From the gain, you must recognize the amount of depreciation actually taken as unrecaptured Section 1250 gain. The remainder of the gain would fall under the Section 121 gain exclusion rules. This is without researching in detail, so please feel free to poke holes in my theory. | |
