Property Sold Tax Strategies
Don't be too quick to judge
Depreciation Recapture Myth
Many tax advisers believe that the benefits of cost segregation and its accelerated depreciation are limited by recapture gains and subsequent taxes when a property is sold. While it is true that depreciation must be recaptured when a property is sold for a gain, a specific examination and calculation of the numbers reveals that cost segregation yields results in almost all circumstances. Ask us to show you the basic math for all the facts and how to manage the numbers by Asset Disposition Analysis.
Managing Depreciation Recapture for Tax Benefit
Disposition Analysis and Reports
The IRS states in Publication 544, Chapter 3, “When you dispose of depreciable property (Section 1250 property or Section 1245 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules.”
The IRS also states in its Form 4797, “If you disposed of both depreciable property and other property (for example, a building and land) in the same transaction and realized a gain, you must allocate the amount realized between the two types of property based on their respective fair market values (FMVs) to figure the part of the gain to be recaptured as ordinary income because of depreciation.”
RPTI believes that these instructions and guidance are of great consequence and that most taxpayers are missing an opportunity for tax savings when their property is sold. If component assets are assigned individual identities and class lives when they are placed into service to reflect the “wear and tear, deterioration, or obsolescence of the property” going forward (Publication 946), it is reasonable that the same inherent logic be applied when the same assets are sold to properly reflect the disposition value or fair market value (FMV) of the assets.
If managed properly with an RPTI Disposition Analysis and Report, depreciation recapture gains are substantially reduced, and healthy tax savings are realized. We have coined the term and call this approach to managing real assets when they are sold Segregated Liquidation.
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