Re: depreciation recapture - Posted by Dave T
Posted by Dave T on March 08, 2002 at 24:19:41:
I am not a tax professional nor do I pretend to be an expert. That said, here is how I would answer your question.
Since you said that the property was fully depreciated, your adjusted basis is now just the original land value. For example, let’s say that you purchased your investment property for 100K – 25K is attributed to the land and 75K to the improvements. Let’s say that you sold the property with 100% financing for 200K using an installment sale.
Since your gross profit on this sale is 175K (200K sale price minus your 25K adjusted basis), 87.5% of the principle payments you receive in any year are taxable income (175K divided by 200K). The rest is a return of your basis and not taxable. Interest received in any year is taxable as ordinary income.
For the taxable portion (87.5%) of the principle payments you receive in any year, allocate the payments between capital gain due to appreciation and gain due to depreciation. Because 75K of your 175K profit is due to depreciation, I would allocate 42.85% (75K divided by 175K) of the taxable principle payments received to depreciation recapture.
In our example, let’s say that you received $2000 in principle payments in the first full year of your installment sale (remember, interest received is taxable as ordinary income). Of this $2000, only $1750 (87.5%) is taxable income.
Now allocate this $1750 between capital gain due to appreciation and depreciation recapture. Using our depreciation to total profit ratio, 42.85% – $750 (in round numbers) – is depreciation recapture. The remaining $1000 is taxable capital gains.
Now, the above discussion assumed that you do NOT have any excess depreciation over straight line. If so, then the excess is taxable in full as ordinary income in the year of sale, but then added to your cost basis before making the rest of the calculations I outlined above.
As to the depreciable components you mentioned, unless your sales agreement specifically itemized the components and assigned a value to each as a portion of the aggregate sales price, I would just let the sale price of each component equal its adjusted basis to simplify the tax reporting.
As I said, I am not an expert, but this is how I would do it.