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How do IRS determine how much depreciation recapture I need to pay?

Forum|Forum|7 years ago
April 1, 2019
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I bought a property in 2012 and start to use it as a rental property in 2016. But I did not claim any depreciation in my last 3 year's tax return since my rental income is almost 0 without the depreciation anyway. But I just learn that IRS will charge depreciation recapture tax no matter if I take depreciation or not when I decide to sell the property.

My question is if I start to do depreciation this year, how should I determine my Cost of asset?

Should I use

1) the purchase value I paid in 2012 minus the land value of my 2016's property tax bill?

2) the purchase value I paid in 2012 minus the land value of my 2012's property tax bill?

3) certain % (say 70%) of the purchase value I paid in 2012?

Will IRS always use the same cost basis I reported in my tax return when they calculate depreciation recapture? Or they have their own way of doing that? If so, what kind of cost basis they will use? I want to make sure I can use all the depreciation allowable in my tax return.

thanks

Best answer by Anonymous_

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PaulaM

Your cost basis for depreciation is its fair market value when you placed the property in service. You may wish to amend your prior returns to include the depreciation. Depending on your whether you were an active participant or not, the loss may offset other income.

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zwang6117Author

thanks.

Then should I use my 2016's property tax bill and use the building value on that as cost basis? I think land is not depreciable. The overall taxable value on my 2016 property tax bill is still much lower than Redfin's estimate (which is close to how much I could get if I sell it in 2016) because the housing market rebounded quite a bit from 2012 to 2016.