Dear BlueSteel
Wangarific-ga is close, but not quite correct.
S/he's wrong about the depreciation;
right about the personal residence exclusion.
Depreciation is an interesting phenomenon in tax law.
It's one of those expenses the tax code calls "allowed or allowable".
I know, that means nothing to you. But to the IRS it means that if
you are using a property for business, you were 'allowed' the
depreciation deduction. If you didn't take it, but used office in
home deductions without it - IRS treats the sale of the property as
if you HAD taken the depreciation.
So, there are two things you will want to know.
1) If you never used the depreciation, but should have, IRS
created a new procedure to let you take all the past due depreciation
at one time - to catch up on the expenses. This comes from IRS
Revenue Procedure 2004-11. You can read Vern Hoven's explanation.
http://www.hoven.com/articles/pdf/allowedorallowable.pdf
This revenue procedure is effective for a Form 3115 filed
for taxable years ending on or after December 30, 2003.
http://www.irs.gov/irb/2004-03_IRB/ar11.html#d0e1923
Use Schedule E on page 8 of Form 3115 to request approval for
the catch-up depreciation. Get a tax professional to help you.
http://www.irs.gov/pub/irs-pdf/f3115.pdf
2) Once you've reported the right deductions for the depreciation,
you can report the sale of your home. Report the sale on Schedule D
of your tax return. IRS pub 523 has this example showing how the
gain is reported on Schedule D. The rate is 25% on the depreciation.
http://www.irs.gov/publications/p523/ar02.html#d0e3674
See the detailed example #3
http://www.irs.gov/publications/p523/ar02.html#d0e4174
Enter the smaller of line 6 or line 10. Enter this amount on line 12 of the
Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D
(Form 1040)
http://www.irs.gov/pub/irs-pdf/f1041sd.pdf
I hope this helps.
But, you really might want to get a tax professional
to help you with this sale to make sure you end up
paying the least amount of taxes on it.
Best wishes,
Your TaxMama-ga |