Rental - Sale of Property/Depreciation

Each asset will be sold off in the asset section where they should have been listed for depreciation purposes ... if you have NOT been taking depreciation RUN to the nearest local tax pro for assistance fixing that error ASAP.

If you have been taking depreciation then the sales price and the cost of sale is prorated to all the assets you have on the asset summary worksheet.

Simple math example :  

                                            Sales price  200K           cost of sale   10K

House   40    = 40%                                 80K                                     4K

land       30    = 30%                                 60K                                     3K

ac           10    = 10%                                 20K                                     1K

roof        20    = 20%                                 40K                                     2K

total      100%

Should I distribute some expenses there from the total expense?

You only need to distribute sales exepenses across the structure and the land. Sales expenses on additional assets can then be zero. It makes the math easier.

There is no fixed formula that you are required to follow for distributing sales expenses across the land and structure. But the general rule of thumb is to distribute percentage-wise.

For example, your cost basis of $645,900 with $218,300 of that allocated to the land. Therefore, since 33.7% of the cost basis is allocated to the land, you should allocate 33-34% of your sales price to the land. Let's say 33% for a nice round number.

Doing the math, 33% of your $670,000 sales price is $221,100. That makes the structure sales price $448,900. Then allocate 67% of your sales expenses to the structure with the remaining 33% to the land.

Now after you do that, you need to allocate your structure sales price across your other assets. You will not change or allocate your land sales price *UNDER ANY CIRCUMSTANCES*.  There are no exceptions.

With a structure cost basis of $427,600 you need to distribute some of that to the roof and HVAC assets. Now understand this, as *THISI *IS* *IMPORTANT*!!!!!

Since you sold the property at a gain, you ***MUST*** show a gain on all assets -even if that gain is only $1 on some assets. If you do not do this, then chances are extremely high that the SCH D *WILL* *BE* *WRONG*!!!

KNowing you have a cost basis on the structure of $427,600, I"m going to assume your cost basis on the roof is $15,000. So I"m going to subtract $15,001 from your structure sales price and assign it to the roof sales price. This means:

Land cost - $218,300   Land sell: $221,100   This shows a $$2,800 gain. Subtract land sales expenses of $7,319 and I sold the land for a $4,519 loss.

Structure cost - $427,600 subtract from that depreciation taken on the structure only to get your adjusted cost basis.

Structure Adj. cost: $209,300 Structure sell: $448,900 This shows a $239,600 gain. Subtract your structure sales expenses of $14,861 and you show a gain of $224,739.

At this point, this will probably cause a problem on the SCH D, since I"m showing a loss on the land and a gain on the structure. So at this point I would start over and allocate 40% of my sales price to the land and 60% to the structure. Here's what I get. (The math is an estimate and not exact. You'll have to use a calculator to get the right numbers yourself.) take note that my initial cost basis DOES NOT CHANGE FOR ANY REASON. I'm only chaning how I allocate my sales price and expenses.

Land cost: $218,300 Land sell: $268,000. Land sales expense: $8,872. I have a gain of $40,828

Structure cost: $427,600 minus $218,300 depreciation is $209,300, so:

Structure Adj Cost: 209,300, sell: 402,000 shows a $192,700 gain. From that subtract 60% of my sales expenses of $13,308 and I have a gain of $179,392

At this point, I'm showing a gain on both the structure and the land, and this is exactly what I want.

Now for the other assets (the roof and HVAC) I can allocate a maximum of 179,391 of my structure sales price to those two additional assets. That way, I will be showing "at least" a $1 gain on "every" "single" "asset" I sold, and this all works out beautifully for the SCH D as well as the 4797.

Now remember, for the roof and HVAC assets, your cost basis is reduced by the amount of depreciation you have already taken on the asset. So remember that when allocating your structure sales price across the other assets.