Please, urgent help given eight days left Just need to wrap my brain around an aspect of recaptured depreciation. After the gain on the sale is calculated, it just does not seem intuitive to me to then subtract recaptured depreciation from the gain of the sale on the real estate Is it being subtracted because accumulated depreciation was less than expected, which is just totally counter intuitive to the name recapture depreciation, obviously it is being recaptured since depreciation was more than expected. Someone explain please
Ignore the term recaptured depreciation. What they ask you to do: A=Net Sales Price B=Purchase Price - Accumulated Depreciation A-B=C C-Accumulated Depreciation=Capital Gains Accumulated Depreciation=Recaptured Depreciation. do this as follows - and you will get the same answer: (Short Cut). Net Sales Price - Original Purchase Price = Capital Gains Accumulated Depreciation=Recaptured Depreciation. Differentiated because you are taking the depreciation for tax purposes - but the property actually does not depreciate. So you need to “recapture” it, and recalculate tax on it when you sell the property…
CP at the point where capital gains are calculated, recaptured dep. is then subtracted even although acc dep reciated was subtracted already from the purchse price. please explain
Do it the way I suggested. you will get the same answer… They are taking the cost basis available on the house = Purchase Price - Accumulated Deprn. then Net Sales - Cost Basis = Total Gains total Gains is then split up into a. Recaptured Depreciation=Accumulated Depreciation. b. Capital Gains = Total Gains - Recaptured depreciation. This is because - you took off depreciation to account for taxes. But now your house has actually appreciated, not depreciated. So all that tax savings you got, you now got to pay back when you sold the house. The way I am suggesting to reduce burden on your calculations… a. Net Sales - Purchase Price = Capital gains They are doing Capital Gains = Net Sales - (Purchase Price - Accumulated Depreciation ) - Accumulated Depreciation Accumulated Depreciation cancels out leaving you with what I have said above. And Accumulated Depreciation = Recaptured Depreciation on which you calculate the Recaptured Dep tax. Does this make sense?
Think of it like this: If net selling price > original cost (likely situation): Net selling price - Original Cost = taxed at capital gains rate Original Cost - Book Value = accumlated depreciation = taxed at depreciation recapture rate If net selling price < original cost (unlikely situtation): No capital gains tax If net selling price > book value, net selling price - book value = taxed at depreciation recapture rate If net selling brice < book value, no taxes (you would actually get a tax credit of some sort)
CPK you are right, I too am thinking like this. If you sold property for gain then pay capital gains else no cap gains. Cap gain =(net selling price - original purchase price) As for recaptured depreciation. I follow this simple rule: If sold for gain then recaptured depreciation = accumulated depreciation If sold for loss then recaptured depreciation = Net selling price - Book value Book value above = purchase price -accumulated depreciation.
CP I know how to calculate the ERAT but was just trying to get a very intuitive way to understand this The method net selling price < original cost use net selling price - book value and net selling price greater than original cost use acc. dep felt very robotic I have so many formulae from so many LOS in my head right now I am trying to be as intuitive as possible CP ur method has helped alot