Property (Basis, Sale of Home, etc.)
This is archived information that pertains only to the 2002 Tax Year. If you
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I lived in a home as my principal residence for the first 2 of the last 5 years. For the last 3 years, the home was a rental property before selling it. Can I still avoid the capital gains tax and, if so, how should I deal with the depreciation I took while it was rented out?
If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. Since you cannot exclude all of the gain, report the entire gain realized on Form 1040, Schedule D (PDF) line 8. Report the amount of exclusion you qualify for on the line directly below the line on which you report the gain. Write Section 121 exclusion in column (a) of that line and show the amount of the exclusion in column (f) as a loss (in parentheses).
For additional information on selling your home, refer to Publication 523 (PDF), Selling Your Home.
References: 11.1 Sale or Trade of Business, Depreciation, Rentals: Depreciation & Recapture What kinds of property can be depreciated for tax purposes?
Only property used in a trade or business or in an income production activity can be depreciated. Additionally, the property must be something that wears out or becomes obsolete and it must have a determinable useful life substantially beyond the tax year. The kinds of property that can be depreciated include, but are not limited to, machinery, equipment, buildings, vehicles, and furniture. Depreciation is a complex topic. For more information, refer to Tax Topic 704, Depreciation, or Publication 946 (PDF), How to Depreciate Property, or Publication 534 (PDF), Depreciating Property Placed in Service Before 1987.
References: I have a rental property. Do I have to take depreciation on it?
You do not have to claim depreciation on your rental property on your tax return. However, when reporting the sale of the rental property you are required to reduce the basis of the property for allowable depreciation regardless of whether the depreciation deduction was taken or not. For more information, refer to Publication 544 (PDF), Sale or Other Dispositions of Assets, the Instructions for Form 4797, Sale of Business Property, and Publication 527 (PDF), Residential Rental Property (including vacation homes).
References: In calculating depreciation on both my rental apartment building and its furniture, what depreciation type, asset class, depreciation method, and recovery period should be used?
An apartment building rented for residential purposes is considered residential rental property. Residential rental property is depreciated, generally, over 27.5 years under the modified accelerated cost recovery system (MACRS) using the general depreciation system (GDS) straight line method with a mid-month convention. Furniture for use in residential rental property, generally, is depreciated over 5 years using the MACRS, GDS 200% double declining balance method with a half-year convention. The convention used may vary depending on when the property was placed in service. Publication 527 (PDF), Residential Rental Property, contains the appropriate depreciation tables as does Publication 946 (PDF), How to Depreciate Property. Attach Form 4562 (PDF), Depreciation and Amortization, to your individual income tax return to claim the depreciation for the year this property is placed into service and for each subsequent tax year in which you own the property.
References: We replaced the roof on a residential rental property and need to know what to use for the classification and recovery period to calculate depreciation?
Replacement of a roof on a residential rental property is a capital improvement to the structure. The roof is in the same class of property as the property to which it is attached. Since the property is residential rental property, the roof is generally depreciated over a residential rental property recovery period, of 27.5 years using the straight line method of depreciation and a mid-month convention. You cannot write off (or take a loss on) any remaining basis in the replaced roof. For more information, refer to Publication 527 (PDF), Residential Rental Property, and Publication 946 (PDF), How to Depreciate Property.
References: On residential rental property, would new windows and siding be considered a repair that could be deducted against income, or would they be capitalized as an improvement?
Replacement of windows and siding on a residential rental property is a capital improvement to the structure, provided the replacement improves the value of this property. The windows and siding, in that event, are in the same class of property as the property to which they are affixed. In this case, the windows and siding are generally depreciated over a recovery period of 27.5 years using the straight line method of depreciation and a mid-month convention. For more information, refer to Publication 527 (PDF), Residential Rental Property, and Publication 946 (PDF), How to Depreciate Property.
References: We have incurred substantial repairs to our rental property: new roof, gutters, windows, furnace, and outside paint. What are the IRS rules concerning depreciation?
Replacements of roof, rain gutters, windows, and furnace on a residential rental property are capital improvements to the structure because they materially add to the value of your property or substantially prolong its life. The items would be in the same class of property as the rental property to which to which they are attached. Since the property is residential rental property, the items are generally depreciated over 27.5 years using the straight line method of depreciation and a mid-month convention.
Repairs, such as repainting the house, are currently deductible expenses. A repair keeps your property in good operating condition. It does not materially add to the value of your property or substantially prolong its life. Repainting your property inside or out, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows are examples of repairs. If you make repairs as part of an extensive remodeling or restoration of your property, the whole job is an improvement. You should capitalize and depreciate the repair costs as the same class of property that you have restored or remodeled. For more information, refer to Publication 527 (PDF), Residential Rental Property, and Publication 946 (PDF), How to Depreciate Property.
References: How many years do I depreciate a new furnace installed as an improvement on residential rental property and what method do I use to compute the depreciation?
Replacement of a furnace in a residential rental property is a capital improvement to the structure. The furnace is in the same class of property as the property in which it is installed. Since the property is residential rental property, the furnace is, generally, depreciated over a recovery period of 27.5 years using the straight line method of depreciation and a mid-month convention. For more information, refer to Publication 527 (PDF), Residential Rental Property, and Publication 946 (PDF), How to Depreciate Property.
References: I purchased a snowblower and a lawn mower strictly for use at a residential apartment building I own. Can I elect the section 179 deduction to fully deduct the costs of the snowblower and lawn mower?
You cannot claim section 179 expense for property held to produce rental income (since it is use in connection with the furnishing of lodging). These assets are classified as 5-year property and must be depreciated as directed in Publication 527 (PDF), Residential Rental Property, and Publication 946 (PDF), How to Depreciate Property.
References: When an individual sells a building, what depreciation is being recaptured? Is it the amount of depreciation taken in the prior years or the depreciation left?
Generally, the amount of depreciation you must recapture for residential rental or nonresidential real property is the excess of the depreciation allowed or allowable over straight line depreciation for the property. Thus, if you sell a building placed in service after 1986 which required the use of the straight-line method, you would not have any depreciation to recapture. However, if you took the 30% special depreciation allowance for your building, this allowance may be subject to recapture. For property placed in 1986 and earlier, see Publication 946 (PDF), How to Depreciate Property. For further information, refer to Publication 544 (PDF), Sales or Other Disposition of Assets, and Supplement to Publication 946 (PDF), How to Depreciate Property.
References: How do I recapture depreciation on rental property that has been sold?
If you dispose of residential rental property placed in service after 1986 (or after July 31, 1986, if the election to use MACRS was made), you would not have any depreciation to recapture because you used a straight-line method. If you do have depreciation to recapture resulting from a gain on the sale, or because you did not meet the condition above, use Form 4797 (PDF), Sale of Business Property, to compute the amount of depreciation recapture.
References: 11.2 Sale or Trade of Business, Depreciation, Rentals: Rental Expenses & Passive Activity Losses (PALs) I purchased a rental property last year. What closing costs can I deduct?
The only deductible closing costs are those for interest, and deductible real estate taxes. Other settlement fees and closing costs for buying the property become additions to your basis in the property. These basis adjustments include: - Abstract fees,
- Charges for installing utility services,
- Legal fees,
- Recording fees,
- Surveys,
- Transfer taxes,
- Title insurance, and
- Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.
- Fees related to obtaining a loan are capital expenses and should be amortized over the life of the loan.
For additional information, refer to Publication 527 (PDF), Residential Rental Property, Publication 17 (PDF), Your Individual Income Tax Guide, and Publication 535 (PDF), Business Espenses.
References: I own a duplex. I live on one side and rent out the other. Are my mortgage interest and property taxes fully deductible on Schedule E?
No. Assuming that the loan is secured by the duplex, only the mortgage interest and property taxes for the portion you are renting are deductible on Form 1040, Schedule E (PDF), Supplemental Income and Loss. If you receive one bill, you should prorate the rental portion based on square footage. Your portion can be deducted on Form 1040, Schedule A (PDF), Itemized Deductions, if you itemize and meet the requirements for Deductible Home Mortgage Interest. For more information, refer to Publication 527 (PDF), Residential Rental Property (including Vacation Homes), Instructions for Form 1040, Schedule E, Supplemental Income and Loss, and Publication 936, Home Mortgage Interest.
References: Can you deduct Private Mortgage Insurance (PMI) premiums on rental property? If so, which line item on Schedule E?
Yes. You can deduct Private Mortgage Insurance premium on line 9 of Form 1040, Schedule E (PDF), Supplemental Income and Loss. Write "PMI" on the dotted line.
References: Where on Schedule E do you put costs paid (points, fees, etc.) to refinance a rental property?
Expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. You may amortize them over the life of the mortgage on line 18 of Form 1040, Schedule E (PDF), Supplemental Income and Loss.
References: I have losses from a passive rental real estate activity in which I actively participate. Can I offset the losses against my nonpassive income?
Generally, if your rental of real estate is a passive activity, you may offset a loss of up to $25,000 against your nonpassive income subject to certain income limitations, if you actively participate in the activity. However, married persons filing separate returns who lived together at any time during the year may not claim this offset. Married persons filing separate returns who lived apart at all times during the year are each allowed a $12,500 maximum offset for passive real estate activities. For additional information on limits on rental losses, refer to Chapter 10 of Publication 17 (PDF), Your Federal Income Tax, and Tax Topic 425, Passive Activities - Losses and Credits, as well as Instructions for Form 1040, Schedule E, Supplemental Income and Loss.
References: 11.3 Sale or Trade of Business, Depreciation, Rentals: Personal Use of Business Property (Condo, Timeshare, etc.) I received income for renting out my timeshare for a week. I understand that I don't have to report income from any rental less than 15 days, but the property management company reported that income to the IRS. Do I have to report it when I file?
If you use the dwelling unit as a home (based on degree of personal use) and you rent it for fewer than 15 days during the year, do not include any of the rent in your income and do not deduct any of the rental expenses. If you do not meet the tests for using your timeshare as your home, the income is reportable on Form 1040, Schedule E (PDF), Supplemental Income and Loss.
References: I rent my home out for two weeks each year. Do I have to show the income on my return?
If you use a dwelling as a home and rent it for fewer than 15 days during the year, do not report any of the rental income and do not deduct any expenses as rental expenses. In this case, you may deduct some expenses on Form 1040, Schedule A (PDF), Itemized Deductions, such as mortgage interest, property taxes, and any casualty losses. For additional information, refer to Tax Topic 415, Renting Vacation Property/Renting to Relatives.
References: I am renting a house to my son and daughter-in-law. Can I claim rental expenses?
In general, if you receive income from the rental of a dwelling unit, such as a house, apartment, or duplex, there are certain expenses you may deduct. Besides knowing which expenses may be deductible, it is important to understand potential limitations on the amounts of rental expenses that may be deducted in a tax year. Whatever expenses you are allowed to deduct will reduce the amount of taxable rental income. For example, if you have no significant personal use, but rent the dwelling unit to your son and daughter-in-law at less than fair market rental value, then you may only deduct rental expenses up to the amount of actual rental income (received). If you do not have significant personal use and rent to your son and daughter-in-law for more than 14 days per year, then the expenses will also be limited to the amount of rental income, but the excess expenses may be "carried over" to a future year.
For more information on which expenses to deduct, as well as limitations, refer to Tax Topic 414, Rental Income and Expenses, Tax Topic 415, Renting Vacation Property and Renting to Relatives, and Publication 527 (PDF), Residential Rental Property (including vacation homes).
References: 11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges What form(s) do we need to fill out to report the sale of rental property?
The gain or loss on the sale of rental property is reported on Form 4797 (PDF), Sale of Business Property. Form 1040, Schedule D (PDF), Capital Gains and Losses, is often used in conjunction with Form 4797. For further information, refer to Publication 544 (PDF), Sale on Other Disposition of Assets,Publication 550 (PDF), Investment Income and Expense, the Instructions to Form 4797 (PDF), Sale of Business Property, and the Instructions to Form 1040, Schedule D, Capital Gain and Losses.
References: We are selling rental property and have never claimed depreciation. What do we do about this when we file our taxes?
When reporting the sale of or computing gain or loss on rental property, you are required to make an adjustment to your basis for allowable depreciation regardless of whether the deduction was taken. For more information refer to Publication 544 (PDF), Sale or Other Dispositions of Assets, and the Instructions for Form 4797, Sales of Business Property.
If you have unclaimed depreciation for two or more years, you must use Form 3115 (PDF), Application for Change in Accounting Method, to claim the depreciation that should have been taken. The Form 3115 must be timely filed for the same tax year in which you sell the rental property or an earlier tax year. If you placed in service the rental property only one year prior to selling it, you may amend your income tax returns using Form 1040X (PDF), Amended U.S. Individual Income Tax Return, to take deductions for the claimed depreciation.
References: I am selling my rental property and was asked to pay the buyer's closing costs. Is all or part of the costs deductible for me?
In computing your gain or loss on the sale, reduce your proceeds from the sale by your selling expenses, including the buyer's closing costs that you agree to pay. Refer to Publication 544 (PDF), Sales and Other Dispositions of Assets, for additional information.
References: How do I file the gain on an installment sale of business property in each year? What form do I use?
Use Form 6252 (PDF), Installment Sale Income, to figure your installment sale income each year. This form does not account for taxable interest income from the sale that needs to be reported each year by the seller, usually on Form 1040, Schedule B (PDF), Interest and Ordinary Dividends.
You may also need Form 1040, Schedule D (PDF), Capital Gains and Losses, and Form 4797 (PDF), Sales of Business Property. For additional information including forms and instructions, refer to Publication 537 (PDF), Installment Sales
References: What forms do we file to report a loss on the sale of a rental property?
The gain or loss on the sale of rental property is reported on Form 4797 (PDF), Sale of Business Property.
References: I sold a rental property in which I had previous years' loss carryovers due to the loss limitation rules. Can I recover the total carryover since the property has been disposed of?
Any available losses limited for that property in prior years may be claimed on Form 1040, Schedule E (PDF), Supplemental Income and Loss.
References: Can you sell rental property and reinvest it into rental property without paying capital gains tax?
No. However, rental property may be exchanged directly for other rental property of like kind. Gain realized from such an exchange is deferred. For additional information on like-kind exchanges, refer to Publication 544 (PDF), Sales and Other Dispositions of Assets.
References: I have heard that I can sell my rental property and use the proceeds to purchase rental property of equal or greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?
What you have heard about is a like-kind exchange. A like-kind exchange, when properly executed, represents a way to postpone the recognition (taxation) of gain essentially by shifting the basis of old property to new property, equal to the amount of the postponed gain. There are several rules and restrictions that must be strictly adhered to in order for a successful exchange to take place. For more information refer to Publication 544 (PDF), Sales and Other Disposition of Assets, and Form 8824 (PDF) Instructions, Like-Kind Exchanges.
References: We sold a rental property last year and used the 1031 Tax Deferred Exchange law to defer the gain into another like-kind property. How do I report this transaction on my tax return?
Report the exchange of like-kind property on Form 8824 (PDF), Like-Kind Exchanges. The instructions for the form explain how to report the details of the exchange. Report the exchange even though no gain or loss is recognized.
If you have any taxable gain, resulting from the transaction, because you had a partially deferred exchange or otherwise received money or unlike property, report it on Form 4797 (PDF), Sale of Business Property, and Form 1040, Schedule D (PDF), Capital Gains and Losses. Refer to Publication 544 (PDF), Sales and Other Dispositions of Assets, which has a detailed section on qualifying like-kind exchanges.
References: Can we move into our rental property, live there as our main home for two years, and sell it without having to pay capital gains tax?
You may be able to exclude your gain from the sale of your main home that you have also used for business or to produce rental income if you meet the ownership and use tests, detailed in Publication 523 (PDF), Sale of Your Home.
However, if you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. (Note: If you can show by adequate records or other evidence that the depreciation deduction allowed (did deduct) was less than the amount allowable (could have deducted), the amount you cannot exclude is the smaller of those two figures.)
The gain, exclusion, and depreciation recapture should be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, as described in Publication 523 (PDF), Selling Your Home.
References: I just sold a commercial rental property my wife and I had purchased thirty years ago (before she passed away) and I want to know how to figure my cost basis. Is it the full appraised value at the time of her death, or is it just half?
The answer depends on in which state you live in. Generally, the basis of property you inherit is its Fair Market Value (FMV) at the date of the decedent's death. If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), and inherit your spouse's interest in a property held as community property, then the basis for the entire property becomes the FMV at the date of your spouse's death. This also assumes that at least half the value of the community property interest is included in the deceased spouse's gross estate. In other states, where the property is owned by you and your spouse as joint tenants, tenants by the entireties, or tenants-in-common, the basis of the one-half that your spouse owned would be increased to one-half of the FMV of the property at the date of death. The basis in the one-half that you owned would remain at the one-half of the pre-death adjusted basis. The new adjusted basis is, naturally, subject to all future routine basis adjustments until the property is either sold or otherwise disposed of.
References:
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