Do these clients even need to file a return?

[Just-Lisa-Now-]

Retired, collect SS and a small pension, but they have a rental property.

Their income with the net profit of the rental is far below the filing threshold, do they really need to file a return?  The gross rents would put them over the threshold, so maybe Ive answered my own question....

If they happen to sell the rental (I dont think they will) the depreciation hasn't been giving them any tax benefit (even without the depreciation they still wouldn't have any taxable income) so would it still be subject to recapture if they sell?

[George4Tacks · Accepted solution]

Forget net profit. What is GROSS income. 

Depreciation recapture is for allowed or allowable, not "taken", so YES they may have to pay capital gain on something they did not benefit from.

They should file to protect their SSN from fraudulent returns. They should file to stay in the system to get stimulus money. They should file because they have already wasted some of your time and you should get paid for filing the return.

When all else fails -  READ THE INSTRUCTIONS! - From the 1040 instructions, page 9 "**Gross income means all income you received in the form of money, goods, property, and services that isn't exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Don’t include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2019, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). 

[poolcleaner]

Lisa, look at the gross income from the rental not the net to see if they are below the filing requirement. They are out of luck on the depreciation that did no good as far as saving money on taxes.

[IRonMaN]

We have a motion and a second to file the return.  All in favor - aye.

[Just-Lisa-Now-]

Ok, I was just overthinking it I guess!   LOL   I will carry on as usual!

Thank you!

[TaxGuyBill]

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@Just-Lisa-Now- wrote:

If they happen to sell the rental (I dont think they will) the depreciation hasn't been giving them any tax benefit (even without the depreciation they still wouldn't have any taxable income) so would it still be subject to recapture if they sell?

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Yes (well, it is actually "Unrecaptured Section 1250 Gain").  The depreciation still lowers their Basis in the property, so their gain will be higher due to the depreciation, and is subject to the normal Unrecaptured Section 1250 Gain rules.

But as you implied, if they are retired, they may consider holding on the property until they die to receive the step-up in Basis.

[IRonMaN]

"But as you implied, if they are retired, they may consider holding on the property until they die to receive the step-up in Basis."

If I had to die to get that tax benefit, I think I would rather just pay the tax 😬

[Just-Lisa-Now-]

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@TaxGuyBill wrote:

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@Just-Lisa-Now- wrote:

If they happen to sell the rental (I dont think they will) the depreciation hasn't been giving them any tax benefit (even without the depreciation they still wouldn't have any taxable income) so would it still be subject to recapture if they sell?

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Yes (well, it is actually "Unrecaptured Section 1250 Gain").  The depreciation still lowers their Basis in the property, so their gain will be higher due to the depreciation, and is subject to the normal Unrecaptured Section 1250 Gain rules.

But as you implied, if they are retired, they may consider holding on the property until they die to receive the step-up in Basis.

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They got dinged hard a few years ago selling a different rental (and inflated their medicare costs too!), I know they are not planning to sell this other one unless some kind of life situation made it the only option.

[TaxGuyBill]

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@IRonMaN wrote:

If I had to die to get that tax benefit, I think I would rather just pay the tax 😬

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LOL.