Discussion:Tax benefit rule/depreciation recapture

YES, it does, therefore NO you can't use the tax benefit rule

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...

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.

If the home office is a totally separate structure from the residence, you must still allocate this as a sale of two separate properties.

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?

(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?

The exception to allowed or allowable is in the Code. All you CodeHeads here should know about it.

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.

"...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.

And for once, a publication actually considers Section 59(g). Well, make it twice since Pub 525 does likewise.

And those who do Pennsylvania returns are familiar with this concept when there are sales of rental properties where depeciation provided no tax benefit.

There is no unrecaptured 1250 gain on sale of an office situated in a home. Depreciation was S/L over 39 years and there would be zero of that.

The IRC says to the extent depreciation was deducted for that office in home, that amount of the gain on sale is not excluded under 121. If gain was less, your recapture is limited to the amount of the gain. Sch D Entry for that amount of the gain and taxed like any other capital gain. No entry to unrecaptured 1250 gain. If you sold at a loss - no recapture and no loss allowed.