Is it necessary to include fully depreciated improvements on form 4797 for sale of rental property?

[joe7230]

Wouldn't including fully depreciated improvements on the 4797 for sale a rental  property result in a wash?

If so, why even include them.

[Camp1040]

Unless you are selling the improvements indivudally, they will be reflected in the selling price of the rental property along with the accumulated depreciation entering into your calculation.

[TaxGuyBill]

It depends on what you mean by improvements.  If you are referring to an improvement to the real estate itself, you are right. 

But if you are referring to non-real estate items, such as appliances or carpet, it wouldn't really be a wash.

The sale price should be allocated based on the Fair Market Value of each item.  In most cases allocating the sale price would reduce the long-term capital gain on the house (taxed at lower rates) and result in a gain for the non-real-estate items (recapture at ordinary tax rates).

With that being said many tax preparers just ignore the non-real estate items and lump it all together with the real estate.  It isn't correct to do it that way, but it is common.

[Camp1040]

Or you can do it Tax guy Bill's way which is more correct.

[IRonMaN]

"With that being said many tax preparers just ignore the non-real estate items and lump it all together with the real estate."

What is the real value of a 15 year old stove?  A 17 year old refrigerator?  Were those items factored into the value of the property or were they so trivial that they were ignored and only thing that mattered in the purchase was the real estate itself.  The seller was happy to leave those things in the building so he didn't have to pay to haul them to the dump 😁

[abctax55]

I report the real property, and the appliances etc, as two separate sales.  In fact, Lacerte 'yells' at ya' if you don't if you are using the bulk sale feature.

I usually report as the sales price, the amount necessary to zero out the gain/loss on the appliances etc.  UNLESS there's something significant involved; or if the sales contract details these non-real property items separately with amounts.  I've seen that happen a few (very few..) times in my career.

Of course, you have to reduce the sales price of the real property by the amount allocated to the appliances, etc.

AND if there's a § 1031 exchange involved there's more to think about as the non-real property items can't be part of the exchange.

[sjrcpa]

If you don't include them, the Unrecaptured 1250 Gain component will be understated.

[TaxGuyBill]

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@sjrcpa wrote:

If you don't include them, the Unrecaptured 1250 Gain component will be understated.

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Good point, I missed that.

[TaxGuyBill]

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@IRonMaN wrote:

What is the real value of a 15 year old stove?  A 17 year old refrigerator?  Were those items factored into the value of the property or were they so trivial that they were ignored and only thing that mattered in the purchase was the real estate itself.  The seller was happy to leave those things in the building so he didn't have to pay to haul them to the dump 😁

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I've seen where clients buy all new appliances the year before the sale and claim 100% bonus depreciation.  They get the tax write-off as a rental and at the same time make the house pretty for buyers for the sale.

[IRonMaN]

But my point was, one size doesn't fit all.  Just because one client does that doesn't mean all of our clients are in the same boat.  Sometimes folks just need to use a little common sense when coming into these situations ------------------------ even though common sense does not appear to not be a real strong trait among a lot of the folks that visit this place 😟

[TaxGuyBill]

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@IRonMaN wrote:

even though common sense does not appear to not be a real strong trait among a lot of the folks that visit this place 😟

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We are all still using Intuit products, so I guess common sense isn't strong in any of us.  LOL.  🤣