Sale of rental property - tax question

[SECplayer]

I've seen a lot of rental property questions in here so maybe somebody knows a quick answer to this:

Bought a property years ago for 160k. Have rented it out for 7ish years.

Ive always reported the rental revenue on my taxes but have been able to "zero it out" to show no income after deducting property taxes, expenses, etc and most importantly depreciation.

160k \ 27.5 = roughly 5,900 a year in depreciation.

I understand that normally my basis would be 160k - (5,900 X 7) = 120k-ish which means I'm going to owe some taxes after this sale.

However, every year on my taxes after showing income and deducting the expenses and depreciation, it actually could be shown as a loss on paper. But since I'm not in the real estate business I wasn't actually able to use that "loss" on paper to lessen my AGI. The most I could do was show $0 in income as opposed to a loss.

Therefore, shouldn't I be able to get some kind of credit for not realizing the full extent of my annual depreciations?

And yes, I plan on discussing with my accountant but thought an answer or two here might help generate some questions that I can ultimately ask.

 

[festeringZit]

The way I understand it is, your cost basis is the $160K - ($5900 * 7), it doesn't matter that you didn't deduct the full depreciation each year...
You could have not depreciated it at all, and your cost basis would be $160K.

 

[festeringZit]

Confirm with Willie99 , he's an accountant

 

[SECplayer]

The way I understand it is, your cost basis is the $160K - ($5900 * 7), it doesn't matter that you didn't deduct the full depreciation each year...
You could have not depreciated it at all, and your cost basis would be $160K.

Thats my guess too unfortunately. If that's the case, I wish I or my accountant had been a bit more forward thinking.

 

[Jstack34]

Your unused loss (passive losses) each year carryover when you can't use them. These get released when you sell the rental property. So if you have had a loss of like $5K each year and you never were able to claim any of it, you will get to take that loss this year on your tax return

 

[Jstack34]

Zit/SEC - He isn't saying that he didn't claim the depreciation, he is saying that he claimed depreciation, but couldn't take the net loss on the rental because his income was above the limit to claim a loss when you aren't a real estate professional (either 125K or 150K).

He does need to consider the depreciation in considering the gain/loss on the sale of the property as you said and you are both right that you have to consider depreciation even if you didn't claim it

 

[Jstack34]

<hd>Disposition of Entire Interest</hd>

• Generally, you may deduct in full any previously disallowed passive activity loss in the year you dispose of your entire interest in the activity.
• In contrast, you may not claim unused passive activity credits upon disposition of your entire interest in the activity. However, you may elect to increase the basis of the credit property in an amount equal to the portion of the unused credit that previously reduced the basis of the credit property.

https://www.irs.gov/taxtopics/tc425.html

 

[SECplayer]

Your unused loss (passive losses) each year carryover when you can't use them. These get released when you sell the rental property. So if you have had a loss of like $5K each year and you never were able to claim any of it, you will get to take that loss this year on your tax return

Great. So my cost basis would still technically be the 160k - (5,900 X 7) but that will be offset somewhat by any unused losses?

 

[festeringZit]

Well, that's good news for me, because I'm in the same boat.

I sold a rental property this year, and had losses that I couldn't claim because I made too much money...

Rental activities are considered "passive" activities, and a loss on a passive activity is not deductible against non-passive income, such as wages. A special rule lets you deduct up to $25,000 of losses from rental real estate in which you actively participate. The $25,000 deduction is phased out when your modified adjusted gross income is from $100,000 to $150,000, resulting in no deduction above $150,000 (for a married filing joint return). See IRS Publication 925 for additional information.

 

[Jstack34]

Right - your cost basis needs to consider the depreciation that you have claimed. So your basis is the 160K - allowable depreciation.

You may also need to look into depreciation recapture. The amount of the gain related to depreciation - so any amount of gain up until your depreciation claimed - is going to be taxed at ordinary income rates rather than as a capital gain. This is done because it was previously used as an offset to ordinary income (rental income). So if your gain is 41,300 or less - all of it will normally be taxed @ 25% and anything above this is taxed at Long Term Capital Gain Rate

 

[Jstack34]

The best places for answers to these questions are the IRS Publications and Turbo Tax. These are usually the first two places that I look when I have an issue I haven't seen before. I deal with mostly expatriate individual income tax, but see non real estate professional rental properties/sales pretty often

 

[SECplayer]

Thanks so much Jstack. After following your links and doing a few more searches now that I know the proper lingo to search, I feel good about getting to use those prior years' unused passive losses.

Beauty of therx; ask a completely off topic question and get an answer 20 mins later.

 

[Willie99]

Your unused loss (passive losses) each year carryover when you can't use them. These get released when you sell the rental property. So if you have had a loss of like $5K each year and you never were able to claim any of it, you will get to take that loss this year on your tax return

This, you get to deduct all suspended (unused) passive activity losses in the year of disposition

 

[Acebb]

Your unused loss (passive losses) each year carryover when you can't use them. These get released when you sell the rental property. So if you have had a loss of like $5K each year and you never were able to claim any of it, you will get to take that loss this year on your tax return

Correct.

I own a house that I rent out and this is the rule.

 

[SECplayer]

Thanks everyone.