VACATION HOME DEPRECIATION ON SALE

Client sold mixed use vacation property held for 10 years. During those 10 years tax s/w calculated $26K of depreciation. However, none of this depreciation was ever allowed on Schedule E because the rental income was always offset by loan interest/taxes/ and operating expenses. On sale s/w wants to adjust basis downward by depreciation then do unrecaptured 1250. Seems incorrect since no depreciation was ever allowed even though allowable. Agree or disagree with sw?

I can't find it right now, but isn't there a provision somewhere in 280A that says that non-cash deductions, such as depreciation, that aren't allowed because of 280A and carried forward, and are then carried forward, and carried forward. and carried forward, get added back to [adjusted] tax basis when the property is finally sold? Maybe it's in the regs. I remember it from many decades ago...

"get added back to [adjusted] tax basis when the property is finally sold? Maybe it's in the regs. I remember it from many decades ago..."

Makes sense to me. You think its in the 280 regs?

I hope it exists, because otherwise 1.111-1 is clear to the contrary.

But the deprecation we're talking about was neither allowed nor allowable, n'est-ce pas?

Probably so. Let's find that reg. or rule or …

The refrig[/i]pbr[i]erator is calling; you'll have to find it without me...

Maybe it's Rev Proc 2013-06. https://www.irs.gov/irb/2013-06_IRB/ar09.html

.06 Depreciation for a taxable year in which the safe harbor method is used. A taxpayer using the safe harbor method for a taxable year cannot deduct any depreciation (including any additional first-year depreciation) or § 179 expense for the portion of the home that is used in a qualified business use of the home for that taxable year. The depreciation deduction allowable for that portion of the home for that taxable year is deemed to be zero.

Section 280A(c)(5) disallows the depreciation, as Harry indicates above. And there is or was a proposed reg. numbered 1.280A-3(d)(3)(iii), and it says or said: "The allocable portion of amounts otherwise allowable as deductions for the taxable year under chapter 1 of the Code by reason of rental use of the dwelling which would result in an adjustment to the basis of property are allowable to the extent the gross rental income exceeds the deductions allowed under subdivision (i) and (ii) of this subparagraph." So in OP's facts, not allowed and not allowable. Here is the link. http://www.bradfordtaxinstitute.com/End ... 0A-3d3.pdf

That reg. was proposed in 1980. I have no idea where it stands. There is a case that references it, not necessarily very favorably, but the case did not involve the basis issue. http://openjurist.org/694/f2d/556/bolto ... al-revenue

Bolton is a well known TC case having to do with allocating expenses between Schedule A & E. Even an option in Proseries tax sw. Still the question is if have $26K of carryover vacation home depreciation is that added to basis upon sale(per Harry)?

Yes per the proposed reg.

Like I said, from a few decades ago, 1980, a proposed reg, even. Lenny, you're a resource!

Now where's my car? Did I have lunch yet? Who's the President?

"deductions ... which would result in an adjustment to the basis of property" - see the reg quote above - is how the regs back then referred to the non-cash deductions that was the part of this that I remembered. Really. UFB

Just what I've always dreamed of being - a resource.

"Like I said, from a few decades ago, 1980, a proposed reg, even. Lenny, you're a resource!
Yes per the proposed reg." This is it below correct. Impressive memories,where do I have the PBR delivered.

(iii) The allocable portions of amounts otherwise allowable as deductions for the taxable year under chapter 1 of the Code by reason of the rental use of the dwelling unit which would result in an adjustment to the basis of property are
allowable to the extent the gross rental income exceeds the deductions allowed or allowable under subdivisions (i) and (ii) of this subparagraph.

Would the proposed reg have been slightly better and a bit tighter if it had said "...to the basis of property are allowable only to the extent the gross rental income exceeds the deductions allowed or allowable..." instead?

… or are not allowable unless …

The depreciation would have been allowed, but carried over on the schedule E. Then the carried over loss would offset the sale of the property.

Similar issue...

I believe that if are deductions carrying forward under 280A, and the property is sold, those deductions disappeared. This is due to the gain on the sale of the property not being gross rental income as defined by 1.280A-3(d)(2). I want to confirm my understanding that the carried forward expenses disappear.

Yes? No? Thank you for any help.

My guess is that the software kept track of the depreciation because it was an “excess deduction” which got carried over to the next year due to the 280A limitation and might have been allowed in a later year if rental income exceeded other deductions. But if it never was allowed, then it doesn’t reduce basis.

My Software (Ultratax) releases the extra depreciation as part of the carried over operating losses, which help offset the gain on the property.