Author Topic: What counts for depreciation as part of the pay back?  (Read 1872 times)

Gin1984

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What counts for depreciation as part of the pay back?
« on: June 06, 2016, 07:25:34 AM »
We are selling our rental and I am trying to figure out taxes.  When it says we have to pay back depreciation does that include the improvements like a new roof or furnaces/water heaters that are also depreciated or just the house?

Rollin

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Re: What counts for depreciation as part of the pay back?
« Reply #1 on: June 06, 2016, 07:51:23 AM »
I'm going to get you started, but there are more that will add to this with much more detail.

Your depreciation is offset by some of those items, but not every improvement. Also, as far as I know you don't pay that $$ back, but you pay 25% of that in taxes.

Here is a thread that I started on this subject (note that I'm still learning about a couple of the things I had incorrect - mainly the long tern capital gain tax rate). You should see a good discussion of the depreciation subject:

http://forum.mrmoneymustache.com/real-estate-and-landlording/lease-option-to-purchase-is-option-part-of-sale-price/new/?topicseen#new

Spitfire

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Re: What counts for depreciation as part of the pay back?
« Reply #2 on: June 06, 2016, 09:18:40 AM »
I think you are referring to depreciation recapture. When you sell your house, you will have to take your net proceeds vs. your tax basis in the property to figure out the gain. Any amount that you took as depreciation over the years will be considered ordinary income and the rest will be capital gain (at the lower rate). Oversimplified example:

House cost: $500k
Depreciation taken: $100k
Tax Basis: $400k (500-100)

Sales price: $600k

You will have a $200k gain here, $100k will be ordinary income because of the depreciation recapture, and $100k will be capital gains.

If you were taking depreciation on those improvements, then it would include that depreciation also.

GuitarBrian

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Re: What counts for depreciation as part of the pay back?
« Reply #3 on: June 07, 2016, 12:03:26 PM »
You will have a $200k gain here, $100k will be ordinary income because of the depreciation recapture, and $100k will be capital gains.

If you were taking depreciation on those improvements, then it would include that depreciation also.

It is important to note, depreciation recapture is taxes as regular unearned income, like rent/short term gains.

Your long term capital gains are taxes at your applicable Long Term Capital Gains rate. Which varies from 0% to 20%.

The worksheet is confusing, but in the end, it separates out your depreciation, and the different tiers of LTCG taxes. Since, like the regular income tiers, you only start paying the higher rate on the amount over the threshold, it can be confusing.

mousebandit

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Re: What counts for depreciation as part of the pay back?
« Reply #4 on: June 07, 2016, 09:46:10 PM »
Is it a 1-year ownership timeline for the sale proceeds to be considered long-term CG? 

Goldielocks

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Re: What counts for depreciation as part of the pay back?
« Reply #5 on: June 07, 2016, 09:57:58 PM »
Check your tax return.  If you claimed depreciation (Capital Cost Allowance, or CCA), it will be on your tax return, and you should have a form where you kept track of how much you have claimed to date.

Depreciation is claimed, to generate losses / offset in rental income.  It is a book keeping assumption that your property wears out over a set number (e.g., 25) years.  It allows you to offset income gradually, and not get a large loss when you sell at the end of life.  BUT When you sell for a gain, you need to claim back those income deductions previously taken.

If you never claimed CCA on prior tax returns, there is nothing to worry about.   

Rollin

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Re: What counts for depreciation as part of the pay back?
« Reply #6 on: June 08, 2016, 05:37:24 AM »
Check your tax return.  If you claimed depreciation (Capital Cost Allowance, or CCA), it will be on your tax return, and you should have a form where you kept track of how much you have claimed to date.

Depreciation is claimed, to generate losses / offset in rental income.  It is a book keeping assumption that your property wears out over a set number (e.g., 25) years.  It allows you to offset income gradually, and not get a large loss when you sell at the end of life.  BUT When you sell for a gain, you need to claim back those income deductions previously taken.

If you never claimed CCA on prior tax returns, there is nothing to worry about.

I am not sure about this, but when I was asking similar questions someone pointed me to some IRS information that stated even if you didn't depreciate you'd pay gains taxes anyway (based on what you could have depreciated with the asset). Doesn't sound fair, but I read it on the internet, so...

jwright

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Re: What counts for depreciation as part of the pay back?
« Reply #7 on: June 08, 2016, 06:53:44 AM »
You have to calculate depreciation recapture on depreciation expense allowed or allowable.  Therefore even if you didn't take the deduction in the past, you still have to pay the recapture.

This assumes you are in the US.  CCA is a Canadian term, I believe.

Goldielocks

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Re: What counts for depreciation as part of the pay back?
« Reply #8 on: June 08, 2016, 11:43:36 AM »
Check your tax return.  If you claimed depreciation (Capital Cost Allowance, or CCA), it will be on your tax return, and you should have a form where you kept track of how much you have claimed to date.

Depreciation is claimed, to generate losses / offset in rental income.  It is a book keeping assumption that your property wears out over a set number (e.g., 25) years.  It allows you to offset income gradually, and not get a large loss when you sell at the end of life.  BUT When you sell for a gain, you need to claim back those income deductions previously taken.

If you never claimed CCA on prior tax returns, there is nothing to worry about.

I am not sure about this, but when I was asking similar questions someone pointed me to some IRS information that stated even if you didn't depreciate you'd pay gains taxes anyway (based on what you could have depreciated with the asset). Doesn't sound fair, but I read it on the internet, so...

CCA recapture is DIFFERENT and separate (mostly) from the capital gains taxes.  You need to do both calculations, and they are subject to different taxation categories.

Gin1984

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Re: What counts for depreciation as part of the pay back?
« Reply #9 on: June 08, 2016, 02:52:32 PM »
Check your tax return.  If you claimed depreciation (Capital Cost Allowance, or CCA), it will be on your tax return, and you should have a form where you kept track of how much you have claimed to date.

Depreciation is claimed, to generate losses / offset in rental income.  It is a book keeping assumption that your property wears out over a set number (e.g., 25) years.  It allows you to offset income gradually, and not get a large loss when you sell at the end of life.  BUT When you sell for a gain, you need to claim back those income deductions previously taken.

If you never claimed CCA on prior tax returns, there is nothing to worry about.

I am not sure about this, but when I was asking similar questions someone pointed me to some IRS information that stated even if you didn't depreciate you'd pay gains taxes anyway (based on what you could have depreciated with the asset). Doesn't sound fair, but I read it on the internet, so...

CCA recapture is DIFFERENT and separate (mostly) from the capital gains taxes.  You need to do both calculations, and they are subject to different taxation categories.
I'm pretty sure that is just a Canadian thing and not to do with the IRS....am I wrong?

Goldielocks

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Re: What counts for depreciation as part of the pay back?
« Reply #10 on: June 08, 2016, 03:50:10 PM »
Check your tax return.  If you claimed depreciation (Capital Cost Allowance, or CCA), it will be on your tax return, and you should have a form where you kept track of how much you have claimed to date.

Depreciation is claimed, to generate losses / offset in rental income.  It is a book keeping assumption that your property wears out over a set number (e.g., 25) years.  It allows you to offset income gradually, and not get a large loss when you sell at the end of life.  BUT When you sell for a gain, you need to claim back those income deductions previously taken.

If you never claimed CCA on prior tax returns, there is nothing to worry about.

I am not sure about this, but when I was asking similar questions someone pointed me to some IRS information that stated even if you didn't depreciate you'd pay gains taxes anyway (based on what you could have depreciated with the asset). Doesn't sound fair, but I read it on the internet, so...

CCA recapture is DIFFERENT and separate (mostly) from the capital gains taxes.  You need to do both calculations, and they are subject to different taxation categories.
I'm pretty sure that is just a Canadian thing and not to do with the IRS....am I wrong?

Capital cost allowance shouldn't be just a canadian thing.  it's kinda like income tax is not just a canadian thing.