Wednesday, January 28, 2015


Barry Dolowich for the Monterey Herald writes: Question:  I am planning to sell a rental property for about $500,000. I purchased the property 25 years ago at a cost of $150,000 (allocated $100,000 to the building and $50,000 to land). The building has long been fully depreciated. I have been told that I have to report a gain of $450,000. It doesn’t seem fair. Is this true?

Answer:  Depreciation represents a deduction for the reasonable allowance for the exhaustion, wear-and-tear of property used in a trade or business, or of property held for the production of income. Depreciation is not allowable for property used for personal purposes, such as a residence or a car used solely for pleasure. Land is not depreciable.
Throughout the past 25 years, you have been taking advantage of the building’s depreciation deduction on your individual tax return. The depreciation deduction has been used to offset your rental income. However, as the building was being depreciated, your tax basis in the building has been reduced by the same amount.
Your accountant is correct in his calculation. Here is why:
Original cost basis of land and building: $150,000.
Less accumulated depreciation of building: 100,000.
Tax basis of land and building at time of sale: $50,000.
Your gain on the sale is $450,000, the difference between the sales price of $500,000 and your tax basis of $50,000. I understand your dismay about having to pay tax on a $450,000 gain rather than the $350,000 ($500,000 selling price less the original cost of $150,000) you expected. Once again, you have already received the tax benefit of the depreciation throughout the years, and now you have to pay for that benefit! Believe it or not, you are actually ahead of the IRS. In your case, you have deducted depreciation against income taxed at high ordinary tax rates, but you will be paying tax now at a lower capital gain rate. SNIP, the article continues @ The Monterey Herald, click here to continue reading...


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