Understanding Depreciating Assets

Forum|Forum|3 years ago
March 4, 2023
2 replies
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December of 2021 I purchased a furnace for a rental property. $10,900. I decided to depreciate it over 5 years since we were thinking about selling and wanted to offset the sale gains. Classified type of asset as F-Rental furnishings. Received $545 depreciation for 2021 taxes. We sold the property in May 2022. I was expecting close to $10K in the final depreciation for this asset but turbo tax only calculated $4,142. Is this a bug in Turbo Tax or am I not understanding depreciation correctly? Thanks

SteveKozAuthor

When you are depreciating assets and you sell the property do you get all the undepreciated value left as a write off or just the current years portion up to the sale and the rest is lost? Just trying to get my head around this. Thanks!

Carl11_2

Employee

When you are depreciating assets and you sell the property do you get all the undepreciated value left as a write off or just the current years portion up to the sale and the rest is lost?

Neither. Many have the incorrect belief that depreciation is a permanent deduction. It is not. When you sell the property/asset, you are required to recapture all depreciation taken in the year of the sale, and pay taxes on it. If one thinks they can get around that by not depreciating the property/asset, that's not so. The law reads that you are required to recapture the depreciation taken, or the depreciation you *should* have taken, in the year the sell the property/asset. Two things about depreciation recapture.

1) Recaptured depreciation is added to your AGI in the tax year you sell. This has the potential to bump you into the next higher tax bracket. It just depends on the numbers.

2) Recaptured depreciation is taxed at the ordinary tax rate anywhere from 0% to a maximum of 25%. Again, it just depends on the numbers.

SteveKozAuthor

Still confused. When I purchased the furnaces I could have taken the entire cost as an expense in the year purchased OR I could depreciate it.. right? As an expense it's deducted from my income in that year and done where what you are saying is that by depreciating it I get to take a bit every year until fully depreciated BUT at some point I have to claim the depreciation when I sell? Sorry I'm not understanding.. Appreciate the help!

Hal_Al

Employee

Basically, the answer is: "it doesn't work that way".

Your cost basis when you sell the asset (furnace) is $10, 900. Then you enter the depreciation previously claimed ($545), which is treated as a section 1250 capital gain ("depreciation recapture"). So, yes you effectively write off $10,355 (10,900 - 545). But you deduct it as cost basis, not depreciation.