Re: Should depreciation recapture reduce sec 121 exclusion? Pub 523 worksheet indicated it a reduction of basis.? Have checked on IRS website for depreciation recapture

John Van Horn · ‎10-11-2022

Client purchase property 2016.  Lived in property for 2 years then rental property, sold property  in 2021.   Net
Gain 138K     Per Pub 523,  TP eligible for 500K  section 121 exclusion.  Per worksheet deprecation recapture is to reduce basis of property.   Deprecation recapture is not clearly address.
Software program  and google search, etc.  Indicates that depreciation recapture $ 30k  is taxable.

Client read Pub 523,  And is questions why the 30K is reducing the 121 Exclusion..

Need link to clearly indicate Depreciation recapture reduces the exclusion amount.

Have searched the IRS website.  No replies for depreciation recapture.     Search for IRS Code section 121.   replies not relevant to Section 121

Thank you in advance

sjrcpa · ‎10-11-2022

Gain to the extent of prior depreciation is taxable. Taxpayer got a tax benefit for it.

The rest of the gain is eligible for the exclusion, according to all the rules.

The more I know the more I don’t know.

Terry53029 · ‎10-11-2022

Have your client see page 14 "Recapturing Depreciation" in pub 523. It is not reducing capital gain exclusion. it is adding the depreciation to ordinary income

John Van Horn · ‎10-11-2022

Thank you. I understand that aspect.

Actually i looking for source link - that describes the rules.

Client is looking at Publication 523 does not clearly describe the rules.

Also have found no reference on the IRS website that explains the rules

John Van Horn · ‎10-11-2022

Thank you.

The only follow up question = It states that you MAY have to take back some or all of the depreciation aa ordinary income

This cash Client is filing jointly entitled to 500K exclusion - Gain is only 138K

Depreciation is 30K Gain with deprecation recapture is 130K which is less than the 500K

View solution in original post

Terry53029 · ‎10-11-2022

@John Van Horn The 121 exclusion is up to $500,000 of Capital gains for MFJ. Any time you claim deprecation you will have to reclaim as ordinary income

TaxGuyBill · ‎10-11-2022

I'm just going on a rant now ... whoever revised Publication 523 a number of years back is a complete idiot.

It is NOT "recapture", it is "Unrecaptured Section 1250 Gain".

It is NOT "ordinary income", it is "capital gain" that is taxed at ordinary rates, up to 25%.

/Rant off/

rbynaker · ‎10-11-2022

@John Van Horn wrote:

The only follow up question = It states that you MAY have to take back some or all of the depreciation aa ordinary income

If you have a loss you do not need to pick up the depreciation as income. That's where the "may" comes in.

Terry53029 · ‎10-12-2022

@TaxGuyBill I agree with you, but I was only trying to get John to understand he has to pay tax on the deprecation

TaxGuyBill · ‎10-12-2022

I'm sorry Terry, that wasn't aimed at you. You were just repeating what the OP and the Publication says.

It's the person at the IRS that I'm annoyed at. It's improved slightly over the last few years, but when they first revised Publication 523 it had SO many outright errors.