Depreciation recapture vs. suspended losses on sale of property

[Anonymous]

Anonymous wrote:

Anonymous wrote:I am on a condo board. When rentals sell often cash deals. And weird prices. For instance a unit worth 330k sold for $139,500 cash. What happens is folks take the max amount they can without triggering cap gains. That amount is for title purposes.

In the $139,500 case later found seller had other debts. Offer code words furniture for sale is clue.

Buyer gets a discount, no realtor fee and often has balls to grieve RE taxes.

IRS tries to bust on this

This makes zero sense and isn’t how the tax laws work. At all.

No what happens is the title price is $139,500. Not actual price.


In fact my condo I paid 290k cash, seller owner it outright, transfer was 1 dollar for transfer purposes. Less recording tax.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I am on a condo board. When rentals sell often cash deals. And weird prices. For instance a unit worth 330k sold for $139,500 cash. What happens is folks take the max amount they can without triggering cap gains. That amount is for title purposes.

In the $139,500 case later found seller had other debts. Offer code words furniture for sale is clue.

Buyer gets a discount, no realtor fee and often has balls to grieve RE taxes.

IRS tries to bust on this

This makes zero sense and isn’t how the tax laws work. At all.

No what happens is the title price is $139,500. Not actual price.


In fact my condo I paid 290k cash, seller owner it outright, transfer was 1 dollar for transfer purposes. Less recording tax.

I don’t know what this had to do with the original post.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don’t think you can offset the depreciation recapture in any case.

This is my understanding. This is why we sold our house vs. renting it out. You can't offset the losses with w-2 income (unless you're in the "business of real estate," but the depreciation continues to reduce your basis, and you lose the residence "safe harbor," so you get hammered on taxes when you sell. The only way it makes sense is if you plan to keep the house forever and let your kids inherit it, and then they get the stepped up basis (Biden has the elimination of stepped up basis in his platform, fyi). However, in the meantime, you have the hassles and expense of maintenance (which you also can't deduct). Unless you're in a market that has a ton of room for appreciation, it makes more sense to put your money in a the market.

It's in close-in NOVA, about a 15-minute commute from the Pentagon. It has appreciated about $40k in the last two years, but who knows if that will continue. I don't know that I could stomach putting all that money in the market, though, so I think a ton of it would just sit in my bank account.

You would be able to offset capital gain with all the passive loss that you have not been able to deduct. How much is your depreciation to-date? You would only owe 25% on that recpature.

Or you can do 1031-exchange and buy something else.

[Anonymous]

Anonymous wrote:I am on a condo board. When rentals sell often cash deals. And weird prices. For instance a unit worth 330k sold for $139,500 cash. What happens is folks take the max amount they can without triggering cap gains. That amount is for title purposes.

In the $139,500 case later found seller had other debts. Offer code words furniture for sale is clue.

Buyer gets a discount, no realtor fee and often has balls to grieve RE taxes.

IRS tries to bust on this

Why would someone sell $330K condo for $139K to avoid taxes? Taxes are part of your gains so a seller would still come ahead if they sell it for close to $330K. What did I miss here?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don’t think you can offset the depreciation recapture in any case.

This is my understanding. This is why we sold our house vs. renting it out. You can't offset the losses with w-2 income (unless you're in the "business of real estate," but the depreciation continues to reduce your basis, and you lose the residence "safe harbor," so you get hammered on taxes when you sell. The only way it makes sense is if you plan to keep the house forever and let your kids inherit it, and then they get the stepped up basis (Biden has the elimination of stepped up basis in his platform, fyi). However, in the meantime, you have the hassles and expense of maintenance (which you also can't deduct). Unless you're in a market that has a ton of room for appreciation, it makes more sense to put your money in a the market.

It's in close-in NOVA, about a 15-minute commute from the Pentagon. It has appreciated about $40k in the last two years, but who knows if that will continue. I don't know that I could stomach putting all that money in the market, though, so I think a ton of it would just sit in my bank account.

Just do the math and see. If you sell now, you will pay zero tax on the $40k. Run a time value of money calculator at some interest value that corresponds to a interest rate you'd get in a CD or some safe investment (although I don't think it's smart to stay out of the market). If you can refinance and rent will cover all rental expenses plus produce some income, calculate taxes on that income (you have to pay taxes on it, even though they won't let you deduct losses), and calculate the amount of interest you save by paying down your primary mortgage with the net income. Make sure to allow for some time when the house isn't rented (painting, etc in between renters). Then calculate the depreciation on the house over time and calculate what your taxes would be when you sell. Remember, it's not a guarantee that real estate prices always go up. Particularly in Arlington, it is possible that the bulk of the appreciation has already happened. Prices could even go down.

When I did this math, it was basically a wash. The hassle of renting and maintaining a home wasn't worth it. Particularly when you consider how illiquid real estate is as an investment. Just like there's no guarantee that real estate prices always go up, there's no guarantee that houses always sell quickly if you need the cash.

Thanks for this. It’s in West Alexandria which I feel like still has some room for price appreciation (maybe like 20k?) in the next few years. Refi will allow rent to cover all expenses, but not be enough that we will pay income taxes on it right now with depreciation.

I was doing some research and suspended losses including depreciation can be used to offset W2 income. I will run the calculations you suggested above. I also kind of like the idea of keeping it in case something happens with either of our jobs so that we have a cheaper place to live.

If you think it would gain further then I say sit on it.

Yes, you are allowed to offset suspended losses with the gain when you eventually sell or W2 income but it has to be within certain $ limits. I believe your AGI has to be $125K or lower.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don’t think you can offset the depreciation recapture in any case.

This is my understanding. This is why we sold our house vs. renting it out. You can't offset the losses with w-2 income (unless you're in the "business of real estate," but the depreciation continues to reduce your basis, and you lose the residence "safe harbor," so you get hammered on taxes when you sell. The only way it makes sense is if you plan to keep the house forever and let your kids inherit it, and then they get the stepped up basis (Biden has the elimination of stepped up basis in his platform, fyi). However, in the meantime, you have the hassles and expense of maintenance (which you also can't deduct). Unless you're in a market that has a ton of room for appreciation, it makes more sense to put your money in a the market.

It's in close-in NOVA, about a 15-minute commute from the Pentagon. It has appreciated about $40k in the last two years, but who knows if that will continue. I don't know that I could stomach putting all that money in the market, though, so I think a ton of it would just sit in my bank account.

You would be able to offset capital gain with all the passive loss that you have not been able to deduct. How much is your depreciation to-date? You would only owe 25% on that recpature.

Or you can do 1031-exchange and buy something else.

I have about $22k in depreciation (to today) and I have $11.5k-ish in suspended losses (as of 12/31/2019).

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don’t think you can offset the depreciation recapture in any case.

This is my understanding. This is why we sold our house vs. renting it out. You can't offset the losses with w-2 income (unless you're in the "business of real estate," but the depreciation continues to reduce your basis, and you lose the residence "safe harbor," so you get hammered on taxes when you sell. The only way it makes sense is if you plan to keep the house forever and let your kids inherit it, and then they get the stepped up basis (Biden has the elimination of stepped up basis in his platform, fyi). However, in the meantime, you have the hassles and expense of maintenance (which you also can't deduct). Unless you're in a market that has a ton of room for appreciation, it makes more sense to put your money in a the market.

It isn’t that much tax though. 25% of depreciation claimed. A fraction of a fraction.

I wouldn’t worry about Biden. Carryover basis is too hard to administer. I could see a mark-to-market requirement becoming law for non-real estate assets, though, and would support that 100%.

But if the house has appreciated in value, and OP waits, they will pay capitol gains on the appreciation over their lower depreciated basis vs. only paying taxes on profits over $500k (if married) over their original, non-depreciated basis. If the house is in the DC area, that tax would be significant. If OP is losing $$ on the house on a month to month basis that they can't deduct on their annual taxes, that's a very bad investment decision.

This isn’t how it works and you are confusing two things.

If OP needs to sell because of the residency requirement to claim the exclusion from capital gains taxes (capital with an A, like money; not capitol with an O, like a building in which legislation is drafted), that’s one thing. Say basis is $300,000 and house is now worth $800,000 and they meet the residency test, sell it with no capital gains tax (federally— some states have have one) and just pay the 25% tax on whatever depreciation value was claimed during its time as a rental. It wouldn’t be that much.

A 1031 like-kind exchange is also a possibility but results in only tax deferral.

Also note that even if they hang on to it, they pay both the capital gains tax and the depreciation recapture.

Nice snark about spelling (I know the difference — spell check got me). But you’re missing the point. That’s what OP is asking — the window is about to close on the ability to claim the exclusion due to the residency requirement. Should they sell now or keep the house and rent into the future, knowing they’ll lose the exclusion?

If that’s actually the question, I vote for selling or a like-kind exchange. Another possibility would be moving back into it some day to reestablish residency for purposes of the exclusion.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I am on a condo board. When rentals sell often cash deals. And weird prices. For instance a unit worth 330k sold for $139,500 cash. What happens is folks take the max amount they can without triggering cap gains. That amount is for title purposes.

In the $139,500 case later found seller had other debts. Offer code words furniture for sale is clue.

Buyer gets a discount, no realtor fee and often has balls to grieve RE taxes.

IRS tries to bust on this

This makes zero sense and isn’t how the tax laws work. At all.

No what happens is the title price is $139,500. Not actual price.


In fact my condo I paid 290k cash, seller owner it outright, transfer was 1 dollar for transfer purposes. Less recording tax.

Well that is a completely different form of tax fraud but doesn’t really involve the IRS.

Am surprised any title attorney would sign off on that.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don’t think you can offset the depreciation recapture in any case.

This is my understanding. This is why we sold our house vs. renting it out. You can't offset the losses with w-2 income (unless you're in the "business of real estate," but the depreciation continues to reduce your basis, and you lose the residence "safe harbor," so you get hammered on taxes when you sell. The only way it makes sense is if you plan to keep the house forever and let your kids inherit it, and then they get the stepped up basis (Biden has the elimination of stepped up basis in his platform, fyi). However, in the meantime, you have the hassles and expense of maintenance (which you also can't deduct). Unless you're in a market that has a ton of room for appreciation, it makes more sense to put your money in a the market.

It's in close-in NOVA, about a 15-minute commute from the Pentagon. It has appreciated about $40k in the last two years, but who knows if that will continue. I don't know that I could stomach putting all that money in the market, though, so I think a ton of it would just sit in my bank account.

You would be able to offset capital gain with all the passive loss that you have not been able to deduct. How much is your depreciation to-date? You would only owe 25% on that recpature.

Or you can do 1031-exchange and buy something else.

No, you can’t use operating losses to offset capital gains, I don’t think. And there are no capital losses for real estate.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don’t think you can offset the depreciation recapture in any case.

This is my understanding. This is why we sold our house vs. renting it out. You can't offset the losses with w-2 income (unless you're in the "business of real estate," but the depreciation continues to reduce your basis, and you lose the residence "safe harbor," so you get hammered on taxes when you sell. The only way it makes sense is if you plan to keep the house forever and let your kids inherit it, and then they get the stepped up basis (Biden has the elimination of stepped up basis in his platform, fyi). However, in the meantime, you have the hassles and expense of maintenance (which you also can't deduct). Unless you're in a market that has a ton of room for appreciation, it makes more sense to put your money in a the market.

It's in close-in NOVA, about a 15-minute commute from the Pentagon. It has appreciated about $40k in the last two years, but who knows if that will continue. I don't know that I could stomach putting all that money in the market, though, so I think a ton of it would just sit in my bank account.

You would be able to offset capital gain with all the passive loss that you have not been able to deduct. How much is your depreciation to-date? You would only owe 25% on that recpature.

Or you can do 1031-exchange and buy something else.

I have about $22k in depreciation (to today) and I have $11.5k-ish in suspended losses (as of 12/31/2019).

All this contortion in the hopes of ducking $5,500 in recapture taxes? Really?

You may end up spending more to overly engineer things and invite an audit.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I am on a condo board. When rentals sell often cash deals. And weird prices. For instance a unit worth 330k sold for $139,500 cash. What happens is folks take the max amount they can without triggering cap gains. That amount is for title purposes.

In the $139,500 case later found seller had other debts. Offer code words furniture for sale is clue.

Buyer gets a discount, no realtor fee and often has balls to grieve RE taxes.

IRS tries to bust on this

Why would someone sell $330K condo for $139K to avoid taxes? Taxes are part of your gains so a seller would still come ahead if they sell it for close to $330K. What did I miss here?

The seller is not selling $139,500. The price is just max price no gains. I once went to buy a NYC condo and flat out he said this is price of unit, this is price of deck furniture. He did not want gain. I did not have cash but was 10 percent off. Was FSBO so no commission and no taxable gains. As a buyer I got a discount, lower title transfer costs a maybe lower property taxes if I grieve

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don’t think you can offset the depreciation recapture in any case.

This is my understanding. This is why we sold our house vs. renting it out. You can't offset the losses with w-2 income (unless you're in the "business of real estate," but the depreciation continues to reduce your basis, and you lose the residence "safe harbor," so you get hammered on taxes when you sell. The only way it makes sense is if you plan to keep the house forever and let your kids inherit it, and then they get the stepped up basis (Biden has the elimination of stepped up basis in his platform, fyi). However, in the meantime, you have the hassles and expense of maintenance (which you also can't deduct). Unless you're in a market that has a ton of room for appreciation, it makes more sense to put your money in a the market.

It's in close-in NOVA, about a 15-minute commute from the Pentagon. It has appreciated about $40k in the last two years, but who knows if that will continue. I don't know that I could stomach putting all that money in the market, though, so I think a ton of it would just sit in my bank account.

You would be able to offset capital gain with all the passive loss that you have not been able to deduct. How much is your depreciation to-date? You would only owe 25% on that recpature.

Or you can do 1031-exchange and buy something else.

I have about $22k in depreciation (to today) and I have $11.5k-ish in suspended losses (as of 12/31/2019).

All this contortion in the hopes of ducking $5,500 in recapture taxes? Really?

You may end up spending more to overly engineer things and invite an audit.

What are you talking about? I’m really trying to decide whether to hold on the property long-term, subjecting myself to capital gains at all, and racking up far more depreciation. This is about how I can use those suspended losses when I sell, and if I should just sell now. I am not trying to contort or duck anything.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don’t think you can offset the depreciation recapture in any case.

This is my understanding. This is why we sold our house vs. renting it out. You can't offset the losses with w-2 income (unless you're in the "business of real estate," but the depreciation continues to reduce your basis, and you lose the residence "safe harbor," so you get hammered on taxes when you sell. The only way it makes sense is if you plan to keep the house forever and let your kids inherit it, and then they get the stepped up basis (Biden has the elimination of stepped up basis in his platform, fyi). However, in the meantime, you have the hassles and expense of maintenance (which you also can't deduct). Unless you're in a market that has a ton of room for appreciation, it makes more sense to put your money in a the market.

It's in close-in NOVA, about a 15-minute commute from the Pentagon. It has appreciated about $40k in the last two years, but who knows if that will continue. I don't know that I could stomach putting all that money in the market, though, so I think a ton of it would just sit in my bank account.

You would be able to offset capital gain with all the passive loss that you have not been able to deduct. How much is your depreciation to-date? You would only owe 25% on that recpature.

Or you can do 1031-exchange and buy something else.

I have about $22k in depreciation (to today) and I have $11.5k-ish in suspended losses (as of 12/31/2019).

All this contortion in the hopes of ducking $5,500 in recapture taxes? Really?

You may end up spending more to overly engineer things and invite an audit.

What are you talking about? I’m really trying to decide whether to hold on the property long-term, subjecting myself to capital gains at all, and racking up far more depreciation. This is about how I can use those suspended losses when I sell, and if I should just sell now. I am not trying to contort or duck anything.

Ok.

Option 1: Sell now. Zero capital gains taxes (assuming the gain is less than $500k and you file jointly). Pay $5,500 in depreciation recapture tax.
Option 2: Hold. Sell later and pay capital gains taxes AND the recapture
Option 2A: Hold. Rent out and continue to depreciate. Move back in some day and reestablish residency. Reverts to Option 1, but with more depreciation recapture taxes due. But presumably the gain is higher as well (and any gain in excess of $500k would be subject to tax). This assumes the laws don’t change.
Option 3: Do a like kind exchange. This would only defer your tax liability, however.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don’t think you can offset the depreciation recapture in any case.

This is my understanding. This is why we sold our house vs. renting it out. You can't offset the losses with w-2 income (unless you're in the "business of real estate," but the depreciation continues to reduce your basis, and you lose the residence "safe harbor," so you get hammered on taxes when you sell. The only way it makes sense is if you plan to keep the house forever and let your kids inherit it, and then they get the stepped up basis (Biden has the elimination of stepped up basis in his platform, fyi). However, in the meantime, you have the hassles and expense of maintenance (which you also can't deduct). Unless you're in a market that has a ton of room for appreciation, it makes more sense to put your money in a the market.

It's in close-in NOVA, about a 15-minute commute from the Pentagon. It has appreciated about $40k in the last two years, but who knows if that will continue. I don't know that I could stomach putting all that money in the market, though, so I think a ton of it would just sit in my bank account.

You would be able to offset capital gain with all the passive loss that you have not been able to deduct. How much is your depreciation to-date? You would only owe 25% on that recpature.

Or you can do 1031-exchange and buy something else.

I have about $22k in depreciation (to today) and I have $11.5k-ish in suspended losses (as of 12/31/2019).

All this contortion in the hopes of ducking $5,500 in recapture taxes? Really?

You may end up spending more to overly engineer things and invite an audit.

What are you talking about? I’m really trying to decide whether to hold on the property long-term, subjecting myself to capital gains at all, and racking up far more depreciation. This is about how I can use those suspended losses when I sell, and if I should just sell now. I am not trying to contort or duck anything.

Ok.

Option 1: Sell now. Zero capital gains taxes (assuming the gain is less than $500k and you file jointly). Pay $5,500 in depreciation recapture tax.
Option 2: Hold. Sell later and pay capital gains taxes AND the recapture
Option 2A: Hold. Rent out and continue to depreciate. Move back in some day and reestablish residency. Reverts to Option 1, but with more depreciation recapture taxes due. But presumably the gain is higher as well (and any gain in excess of $500k would be subject to tax). This assumes the laws don’t change.
Option 3: Do a like kind exchange. This would only defer your tax liability, however.

How can I use the suspended losses? That is my question.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don’t think you can offset the depreciation recapture in any case.

This is my understanding. This is why we sold our house vs. renting it out. You can't offset the losses with w-2 income (unless you're in the "business of real estate," but the depreciation continues to reduce your basis, and you lose the residence "safe harbor," so you get hammered on taxes when you sell. The only way it makes sense is if you plan to keep the house forever and let your kids inherit it, and then they get the stepped up basis (Biden has the elimination of stepped up basis in his platform, fyi). However, in the meantime, you have the hassles and expense of maintenance (which you also can't deduct). Unless you're in a market that has a ton of room for appreciation, it makes more sense to put your money in a the market.

It's in close-in NOVA, about a 15-minute commute from the Pentagon. It has appreciated about $40k in the last two years, but who knows if that will continue. I don't know that I could stomach putting all that money in the market, though, so I think a ton of it would just sit in my bank account.

You would be able to offset capital gain with all the passive loss that you have not been able to deduct. How much is your depreciation to-date? You would only owe 25% on that recpature.

Or you can do 1031-exchange and buy something else.

No, you can’t use operating losses to offset capital gains, I don’t think. And there are no capital losses for real estate.

Yes, you can use passive operating loss to offset capital gain. They can't tax you double and also won't let you use previous loss.