Tax Guru – Ker$tetter Letter

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Archive for the ‘4562’ Category

Depreciation recapture on residence sale…

Posted by taxguru on February 20, 2014

From a reader:

Subject: Q Sale of principal residence in 2013 which was rental property from 1986 t0 2002 – Do we have to recapture depreciation and pay capital gain on depreciation

Hello Mr. Kerstetter:

We have recently moved to a new area after the sale of our principal residence. Not knowing a lot of people in this area, I have tried to find someone who knows for sure if we will owe capital gains on the sale of our single family home, which we occupied from 2003 thru 2013. The home was a single family rental from 1986 to 2002, on which we took S/L depreciation.

I have asked potential tax preparers if they know the answer, and they have given a variety of answers, from “you will owe nothing as you sold for under $250,000 and you lived in it for 2 out of 5 recent years”, etc. Others indicate they will have to research the answer. As you are the tax guru, we would appreciate your view since we want to file tax return correctly by April 15th.

Thank you for your anticipated reply.

 

My reply:

Actually, the law is fairly explicit on this issue.

Any depreciation you claimed after May 6, 1997 will have to be recaptured and reported as income on your tax return.
The rest of the gain will be tax free.

Good luck.  I hope this info helps.

 

Follow-Up 1:

Mr. Kerstetter:

Thank you for your quick reply. From what I had read, I thought this might be the answer, but could not get a definitive answer from potential tax preparers, who I now hesitate to hire. Do you think I could accomplish an accurate return using Turbo Tax on my own? (I have used Turbo Tax in “uncomplicated years” previously.)

I called the I.R.S. for clarification last week and was on hold for 1 1/2 hrs — no one ever picked up the line.

 

My Reply:

I have never been a fan of DIY tax programs, except for the most basic 1040-EZ type of tax returns.  If any other schedules or forms are needed, such programs are actually dangerous.  It’s similar to giving you a scalpel and a copy of a medical book and assuming you can perform surgery on yourself or on a loved one.

DIY tax programs are the best illustration in the world of the old adage for computers, GIGO (Garbage In, Garbage Out).  Even the most expensive tax programs, such as the one I use (Lacerte), can’t do the job on their own.  They require knowledgeable users who know how to enter data properly to prepare a correct tax return with the lowest legal tax.

Any experienced preparer should be able to help you reduce your taxes by more than what his/her fee is, in addition to reporting the recapture gain properly.

In regard to locating a good tax preparer, you should check out the tips I have on my website.   You can also quiz potential preparers with the recapture rule we have been discussing.  It’s been the law since May 6, 1997; so anybody in the tax business should know it and have actual real world experience working with it.  If not, you should find someone else.

Good luck.

Kerry

 

Follow-up #2:

Hello Mr. Kerstetter:

Thank you for your reply to my question. You would be surprised at the answers I have rec’d from potential preparers. After explaining my situation, I have asked “have you had to deal with this type of situation before?” and none of the respondents have said “Yes”.

I will visit your website as suggested, and will look for a preparer in this area I feel is competent.

Thank you again.

 

My final comment:

Actually, I am very surprised that so many preparers haven’t had to work with a provision of the tax code that has been in place almost 17 years now.

Maybe it’s because real estate taxation has been a kind of specialty for me; but I have seen it in tons of client cases; not just for converted rentals, but also for home office situations.

Good luck in locating a new experienced professional preparer.

Kerry

 

TaxCoach Software: Are you giving your clients what they really want?

 

Posted in 121, 4562 | Comments Off on Depreciation recapture on residence sale…

2012 Vehicle Depreciation Amounts

Posted by taxguru on March 7, 2012

Each year, IRS issues the amounts that can be claimed as depreciation for vehicles placed into service that year, over their useful lives.  As has been the case since these Luxury Vehicle rules were implemented in 1984, they do not apply to vehicles weighing more than 6,000 pounds GVW.

Revenue Procedure 2012–23 (courtesy of CCH) has the following amounts for business vehicles placed into service during 2012. 

Passenger Automobiles:
Year 1 –  $3,160 ($11,160 if bonus depreciation applies)
Year 2 –  $5,100
Year 3 –  $3,050
Year 4 and on – $1,875 per year 

Trucks and Vans:
Year 1 –  $3,360 ($11,360 if bonus depreciation applies)
Year 2 –  $5,300
Year 3 –  $3,150
Year 4 and on – $1,875 per year

 

TaxCoach Software: Finally! Plain-English Tax Planning That Builds Your Business!

 

Posted in 4562, Vehicles | Comments Off on 2012 Vehicle Depreciation Amounts

Recapturing Depreciation

Posted by taxguru on February 27, 2012

 

Q:

Subject: Section 179 deduction question

Hi Kerry, I hope you’re doing well today. I came across one of your tax guru web pages (http://www.taxguru.org/incometax/Rates/Sec179.htm) as I was seeking some tax advice. Thank you in advance for providing the information. I do have a question and wondering if you wouldn’t mind assisting me as it pertains to section 179.

I had purchased and placed in service a 2010 Cadillac Escalade (shorter model) on Sept. 9, 2010 as I am a self-employed individual and had utilized the vehicle for my consulting business (sole proprietor) the day of inception thru the remainder of year 2010 and all of year 2011. I had taken the section 179 deduction for tax year 2010 of $25,000 plus the allowable bonus depreciation of $11,855 for a total of $36,855 deprecation deduction in tax year 2010.

At this time, I hit extremely difficult income times as my income has decreased over 70% starting from the beginning of October 2011 to present as my consulting contracts have just about dried up and now I have to look at getting rid of assets. Unfortunately, I can’t afford the Escalade at this time and need to dispose of it immediately. If I were to sell it outright today and not trade it for any like-kind exchange, what tax implications would I be looking at for tax year 2012 meaning, what estimated tax do you think I would have to pay in the disposition of the Escalade? Additional information is I claimed the 5 year recovery period using the 200 DB-HY method/conversion and entered the cost basis of the esclade as $61,855 (that’s what I paid for it).

I’m only asking for an estimate, if you can provide one, and thank you very, very much in advance, if you’re able to provide an answer. I really appreciate it.

best regards,

 

A:

Calculating the taxable gain is pretty straight forward.

Add up all of the Section 179 and depreciation deductions you have claimed for the vehicle and then subtract that from your original purchase price. That will give you the adjusted cost basis (aka Book Value) of your vehicle. Anything above that amount that you sell it for will be your gain.

This gain, which is technically depreciation recapture, will be taxed as ordinary income on your 1040. The actual rate you will be paying for it will depend on your other income and deductions and what tax bracket you are in.

A professional tax advisor can work with your specific numbers to get you a more precise estimation of the tax effect of the sale. Another way to do this, if you are taking the risky approach of preparing your own tax returns, is to use whatever software you have for the 2011 returns and prepare a proforma 2012 with the sale of your Escalade and your other estimated 2012 figures.

You didn’t say whether you paid cash for the Escalade or financed it. The gain calculation is the same either way. However, you need to remember that the debt relief from the pay-off or assumption of any loan you may still have on the vehicle is considered to be the same as receiving cash by IRS. The total sale price will be the loan balance paid off plus any cash you receive.

Good luck. I hope this helps.

Kerry Kerstetter

 

 

Posted in 179, 4562, Vehicles | Comments Off on Recapturing Depreciation

2010 Vehicle Depreciation Limits

Posted by taxguru on November 19, 2009

CCH has calculated the inflation adjustments for the depreciation limits on business vehicles first placed into service in 2010.  Based on past experience, they expect IRS to release their official version of the calculation in April 2010.

Ever since the ridiculously low luxury car limits on depreciation were initiated in 1984, we have had to break the news to clients that they were driving luxury cars in the eyes of the IRS, even though that wasn’t reflected in reality.

The new limits per CCH:

Passenger Vehicles:

Year 1                            $3,060
Year 2                              4,900
Year 3                              2,950
Year 4                              1,775
Year 5                              1,775
    Five Year Total         $14,460

Trucks & Vans:

Year 1                       $3,160
Year 2                         5,100
Year 3                         3,050
Year 4                         1,875
Year 5                         1,875
    Five Year Total    $15,060

 

Posted in 4562, Vehicles | Comments Off on 2010 Vehicle Depreciation Limits

Bonus Depreciation – New or Used?

Posted by taxguru on November 12, 2008

Q:

Subject:  Special Bonus Dep and Section 179

Hello:

I saw on your website that used vehicles qualify for section 179 deduction, but will a used vehicle qualify for the 50% special bonus depreciation allowed under the 2008 eco stimulus package…or does it have to be a new vehicle?

Thank you

 

A:

While Section 179 deductions have always been available for business equipment that had been previously owned by unrelated parties, one of the requirements for special first year bonus depreciation has always been that it was only available for the first user of that specific asset.  So, a used vehicle will not qualify for the special bonus depreciation.

Your personal professional tax advisor should be able to give you more specific advice for your unique circumstances.

Good luck.

Kerry Kerstetter

 

Follow-Up:

Super. Great website. Thank you for your response and clarification. Best of luck to you!

 

 

Posted in 4562 | Comments Off on Bonus Depreciation – New or Used?

Depreciation Errors?

Posted by taxguru on May 6, 2007

Q-1:

Subject: Salvage / Basis Reduction; Special Depreciation

Hi Kerry,

I can’t express how much I have appreciated all the knowledgeable responses you have posted. Hope you can answer my questions.

I have been taking a stronger interest in my financial affairs. I recently reviewed my taxes and am attempting to educate myself on the in and outs of the 1040. My question is in regards to Depreciation. My former accountant made a few decisions that I am unclear on. I own two rental houses and a R.V. He listed my rental houses as residential throughout my return except on form 4562 where he depreciated them under classification (i) Nonresidential real property, which is depreciated over 39 years (MM S/L) as opposed to classification (g) which is subject a 27.5 year schedule. He also placed $50,000 of the $200,000 Cost / Basis (purchase price) under Salvage / Basis Reduction, which reduced the Depreciation Basis to $150,000.

For my R.V. which I purchased in 2002 he placed almost $17,000 above the purchase price in the Special Depreciation Allow column, which increased the Cost / Basis by that same amount but reduced it Deprecation Basis back down to the purchase price. Then in subsequent years he used the larger Cost / Basis figure as the Deprecation Basis.

I no longer work with him, but I just wanted to ask him some informed questions about my return.

Thank you in advance for your time,

**Please note that you have my permission to reword or break my questions into multiply post. In fact, I would appreciate it if you would not use my actual figures but rather replace them with any figure you deem appropriate of useful. Thank you again for providing such a valuable service.

A-1:

These are really questions that you should be going over with your new tax advisor. In fact, it would a good item to use in screening potential new tax pros; having them review your depreciation schedules and explain to you what happened and what they would do about it. You can compare their responses to mine below.

If the properties are residential, it sounds like a computer coding error, if the 39 year life was used instead of the proper 27.5 years. The net effect for the prior years wouldn’t be enough to justify going back and filing amended tax returns. However, from this point forward, I would start using the correct 27.5 year life.

There are several methods used to determine the value of the non-depreciable land to set up as the property’s salvage value. Your prior accountant may have a standard percentage of the total purchase price that he uses or he may have used the percentage from one of your property tax bills. If you think that you have a better more accurate way to calculate this, use it and change the salvage value from this point forward. Again, this is too minor to justify filing amended tax returns for previous years.

On the RV, if you look on the 4562 and detailed depreciation schedule attached to your 2002 1040, you should see the $17,000 of first year bonus depreciation. This number is simply being carried forward by the tax software and is standard procedure. Most tax programs prepare detailed depreciation schedules that reflect the historical amounts for each item. There shouldn’t be anything to be concerned about, unless there was no bonus depreciation in 2002, and your most recent tax preparer didn’t also prepare 2002 and made a mistake when entering carryover assets into his tax program.

It sounds as if you are not reading the depreciation schedule properly. The actual depreciable basis of the RV should be the purchase price less the bonus depreciation and any Section 179 that was claimed. Again, your new (or potential) tax preparer should have no problem deciphering the schedules and explaining them to you, including any changes that need to be made. S/he will need to see the actual printed schedule rather than rely on your narrative of what it says.

I hope this helps.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,

Thank you for your incredibly quick and informative response. I learned more in reading your email than I have in hours researching on the internet and speaking with accountants!

Unfortunately, my accountant made few large errors in my 2003 return. He forgot to include $11,000 in interest payments on my house and he forgot to include my CA state tax paid. I also reviewed the depreciation schedule for my RV in 2002 and he did in fact add the $16,950 bonus deprecation to the cost basis (so my depreciation is based on an inflated figure).

Anyways, I’m relieved to know that I can switch my depreciation schedule for my rental properties to 27.5 years. Do you think I should file amended returns for the $11,000 interest and CA state tax that was left out?

Thank you in advance for your time. I know you must have a million emails to respond so I understand that if in the process of allocating your time you are unable to respond. Please note that I really appreciated your useful advice and I will not take any more of your valuable time.

Regards,

A-2:

Financially, depending on your tax brackets, going back to pick up $11,000 of missed interest expense could very well be worth it to you. You have three years after the return to file it, and you are earning 8% interest on the refund all this while, so there is no immediate rush to do this.

However, you need to consult with your new personal tax advisor as to the climate in your area regarding IRS’s processing of amended returns requesting refunds. As I have written about over the past few years, they had been automatically initiating full blow audits on all amended tax returns claiming refunds. From isolated reports from some tax pros around the country, IRS seems to have eased up on this in the last few months; but your new tax pro should be more up to date on this for your specific area and IRS Service Center.

I hope this helps.

Good luck.

Kerry Kerstetter

Posted in 4562 | Comments Off on Depreciation Errors?