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Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. For information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2. If you received severance damages for part of your property because another part was condemned and you buy replacement property, you can elect to postpone reporting gain. You can postpone reporting all your gain if the replacement property costs at least as much as your net severance damages plus your net condemnation award (if resulting in gain).

For information on nonbusiness bad debts, see chapter 4 of Pub. Although this discussion generally refers to Schedule D (Form 1040) and Form 8949, many of the rules discussed here also apply to taxpayers other than individuals. If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined below).

This term includes oil or gas storage tanks and grain storage bins. Bulk storage means the storage of a commodity in a large mass before it is used. For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. To be fungible, a commodity must be such that each of its parts are essentially interchangeable, and each of its parts are indistinguishable from another part. The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property.

  1. The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property.
  2. Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items.
  3. If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income.
  4. In addition, this gain or loss treatment does not apply to income realized by an owner who is a co-adventurer, partner, or principal in the mining of coal or iron ore.
  5. The IRS will also compare the asset’s realized gain with its depreciation expense.
  6. The interest or growth factor will be treated as interest, regardless of whether it is paid in like-kind property, money, or unlike property.

Immediately after the transfer, you control the corporation. Your adjusted basis in the transferred property is $20,000. The stock you receive has a fair market value (FMV) of $16,000. The corporation also assumes a $5,000 mortgage on the property for which you are personally liable. However, solely for purposes of whether a person is a disqualified person as your agent, the following services for you are not taken into account.

This means any gain from the exchange is not recognized, and any loss cannot be deducted. Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Report gain (other than postponed gain) or loss from a condemnation of property you held for business or profit on Form 4797.

Key Takeaways: Navigating Rental Property Depreciation

If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. If the buyer returns the property in the same tax year of sale, no gain or loss is recognized. This cancellation of the sale in the same tax year it occurred places both you and the buyer in the same positions you were in before the sale. If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. When the property is returned in a later tax year, you acquire a new basis in the property.

Rental Property Depreciation: Calculate Depreciation, Understand Tax Deductions, and Navigate Depreciation Recapture

The calculation of depreciation for rental properties is a systematic process that begins with establishing the property’s basis. This basis is generally the acquisition cost, which includes the purchase price, legal fees, recording fees, and any other expenses involved in securing the property. Improvements that add value to the property, prolong its life, or adapt it to new uses also contribute to the basis.

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You sold your building for $24,000 under threat of condemnation to a public utility company that had the authority to condemn. You paid $25,000 for the building and spent an additional $1,000 for a new roof. You claimed allowable depreciation of $4,600 on the rental half. You spent $200 in legal expenses to obtain the condemnation award.

If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. The percentages for these types of real property are as follows. The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale.

If you are an owner-investor, similar or related in service or use means that any replacement property must have the same relationship of services or uses to you as the property it replaces. You decide this by determining all of the following information. If severance damages are included in the condemnation proceeds, the special assessment depreciation recapture retained out of the severance damages is first used to reduce the severance damages. Any balance of the special assessment is used to reduce the condemnation award. You sold part of your property to the state under threat of condemnation. The contract you and the condemning authority signed showed only the total purchase price.

The exchange of property for the same kind of property is the most common type of nontaxable exchange. To be a like-kind exchange, the property traded and the property received must be both of the following. You can replace property by acquiring a controlling interest in a corporation that owns property similar or related in service or use to your condemned property. You have controlling interest if you own stock having at least 80% of the combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation.

Well-positioned properties can strive to provide consistent cash flow from operations, in addition to appreciation in the property’s intrinsic value. And, if you are a real estate investor, you could access this property value appreciation, either via a sale of the asset or a refinance of debt obligations. Before we talk about recaptured depreciation, it’s essential to understand the basics of depreciation. Depreciation is an accounting method that allows a company to spread the cost of an asset over its useful life. Therefore, instead of taking the total cost of the asset as a one-time expense, the company can spread out the cost over several years.

If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight-line method. For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rates, later.


If the realized gain ends up being negative (a realized loss), there is no depreciation recapture as you sold the item for a loss and will not need to pay income or capital gains taxes. However, if the realized gain is a positive number you will need to pay income tax or capital gains tax on that amount. You will then compare the realized gain to the accumulated depreciation. Whichever number is smaller is your depreciation recapture. Any amount of realized gain above the initial purchase price of the asset will be taxed as a capital gain, and all accumulated depreciation will be taxed as normal income.

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