QUESTION ANSWERED - House I paid 157k in 2007 sold for 55k in 2018

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Rowan Oak
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QUESTION ANSWERED - House I paid 157k in 2007 sold for 55k in 2018

Post by Rowan Oak » Thu Aug 09, 2018 1:57 pm

In 2007 I bought a house to use as a rental property for $157,000. It was a rental until early 2018 when I sold the house for $55,000. A loss of over $100,000. Today, in an email, my CPA told me I will likely pay capital gains tax on the sale, because of the depreciation I took over the last 10 years. I was shocked to hear this. Does this sound correct?

Thank you for your time and help

Update Thu Aug 09, 2018 4:05 pm:

I spoke with my CPA. Said he looked at the wrong number on my depreciation schedule. There will be an ordinary loss of over 70,000.

Thanks to everyone who replied!
Last edited by Rowan Oak on Thu Aug 09, 2018 6:42 pm, edited 5 times in total.

Jack FFR1846
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Re: House I paid 157k in 2007 sold for 55k in 2018 - over 100k loss - CPA saying I will owe capital gains tax

Post by Jack FFR1846 » Thu Aug 09, 2018 1:59 pm

If you took more than $100k in depreciation, that should not be a surprise.
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bogglehead125
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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by bogglehead125 » Thu Aug 09, 2018 2:01 pm

If you don't mind sharing, where in the country are property values still down 2/3 from peak? Metro areas seem to have recovered by now

MichCPA
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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by MichCPA » Thu Aug 09, 2018 2:01 pm

Rowan Oak wrote:
Thu Aug 09, 2018 1:57 pm
In 2007 I bought a house to use as a rental property for $157,000. It was a rental until early 2018 when I sold the house for $55,000. A loss of over $100,000. Today, in an email, my CPA told me I will likely pay capital gains tax on the sale, because of the depreciation I took over the last 10 years. I was shocked to hear this. Does this sound correct?

Thank you for your time and help
If you took depr there is a recapture provision. I didn't specialize in tax but I think that is Section 1245.

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by niceguy7376 » Thu Aug 09, 2018 2:05 pm

Based on my rudimentary info and calculations:

Assume that your house value (excluding land) in 2007 was 157K.
Depreciation is spread across 27.5 years.
So on average, yearly depreciation over 10 years would come as (157K/27.5)*10 = 57090.
Give or take a bit more depreciation in the beginning and I still dont know how it can be more than 100K .

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Rowan Oak
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Re: House I paid 157k in 2007 sold for 55k in 2018 - over 100k loss - CPA saying I will owe capital gains tax

Post by Rowan Oak » Thu Aug 09, 2018 2:07 pm

Jack FFR1846 wrote:
Thu Aug 09, 2018 1:59 pm
If you took more than $100k in depreciation, that should not be a surprise.
It was my understanding that depreciation is taken over 27.5 years and for 157k over 10yrs that's only around $57,090 if my calculations are correct.
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47Percent
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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by 47Percent » Thu Aug 09, 2018 2:09 pm

Rowan Oak wrote:
Thu Aug 09, 2018 1:57 pm
In 2007 I bought a house to use as a rental property for $157,000. It was a rental until early 2018 when I sold the house for $55,000. A loss of over $100,000. Today, in an email, my CPA told me I will likely pay capital gains tax on the sale, because of the depreciation I took over the last 10 years. I was shocked to hear this. Does this sound correct?

Thank you for your time and help
I don't see how this is possible with the details you have given.
Depreciation is taken on a 27.5 year amortization. In 11 years you could have taken less than half of the cost as depreciation. Even that is taken only on the building, as no depreciation can be taken on the land value. My guess is you would have taken only about $50K in depreciation.

Did you by any chance sell it plainly below market to someone who is related to you? Then the sale price is artificially low and a different method needs to be used for calculating the gain.

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by Rowan Oak » Thu Aug 09, 2018 2:12 pm

niceguy7376 wrote:
Thu Aug 09, 2018 2:05 pm
Based on my rudimentary info and calculations:

Assume that your house value (excluding land) in 2007 was 157K.
Depreciation is spread across 27.5 years.
So on average, yearly depreciation over 10 years would come as (157K/27.5)*10 = 57090.
Give or take a bit more depreciation in the beginning and I still dont know how it can be more than 100K .
That's exactly what I was thinking. Yes, I think my CPA just rushed through my notes I gave him about our 2018 tax situation with the loss on this rental property. Sure hope so anyway.

Thank you very much for taking the time to help
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by Rowan Oak » Thu Aug 09, 2018 2:15 pm

47Percent wrote:
Thu Aug 09, 2018 2:09 pm
Rowan Oak wrote:
Thu Aug 09, 2018 1:57 pm
In 2007 I bought a house to use as a rental property for $157,000. It was a rental until early 2018 when I sold the house for $55,000. A loss of over $100,000. Today, in an email, my CPA told me I will likely pay capital gains tax on the sale, because of the depreciation I took over the last 10 years. I was shocked to hear this. Does this sound correct?

Thank you for your time and help
I don't see how this is possible with the details you have given.
Depreciation is taken on a 27.5 year amortization. In 11 years you could have taken less than half of the cost as depreciation. Even that is taken only on the building, as no depreciation can be taken on the land value. My guess is you would have taken only about $50K in depreciation.

Did you by any chance sell it plainly below market to someone who is related to you? Then the sale price is artificially low and a different method needs to be used for calculating the gain.
No, the buyer is not related to me in any way. Thanks for your help
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by bhough » Thu Aug 09, 2018 2:21 pm

I'm not a CPA, but when I take depreciation on my single family rental houses, I can depreciate only the property, not the land. Land does not depreciate or wear out. It can certainly go down in value though. Additionally, depreciation has varying timelines. One can appreciate a refrigerator over 5 years, the expected life of the fridge, but I understood commercial RE is deprecated over 39 and residential ER over 27.5. Therefore, if you purchased the property in 2007 for $157,000, let's say that $37,000 of that was the value of the land. Next, you are left with $120,000 to depreciate over 27.5 years. You are only 11 years into this depreciation. To make the math easier, let's say you are halfway there. So now the market says the house is worth $55,000. Your cost basis should be $37,000 (cost basis of the land) + 1/2 ($120,000) or $37,000+$60,000 or $97,000. Your cost basis is not the original $157,000, as the asset has depreciated. IF you then sell it for less, you should have a loss, not a gain of $97,000-$55,000=$42,000.

If your accountant found a way to depreciate the structure to 0 over a shortened time span and you pocketed that money as income, then I think you have a different problem, as I don't think that is legal. But I could be wrong about the legal aspect if this.

Please correct me if I'm wrong about the depreciation and cost basis portion. But don't use the words "depreciation recapture" as your sole argument because all that describes is the reduction in your basis and the higher tax you must pay when you sell, due to the higher income you received those years you counted depreciation as an expense.

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by Braje » Thu Aug 09, 2018 2:25 pm

How much depreciation have you taken in total? I believe the tax rate is up to 25% on recapture depreciation.

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Rowan Oak
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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by Rowan Oak » Thu Aug 09, 2018 2:36 pm

Braje wrote:
Thu Aug 09, 2018 2:25 pm
How much depreciation have you taken in total? I believe the tax rate is up to 25% on recapture depreciation.
only 10 years so around 57k.
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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by denovo » Thu Aug 09, 2018 2:41 pm

Rowan Oak wrote:
Thu Aug 09, 2018 1:57 pm
In 2007 I bought a house to use as a rental property for $157,000. It was a rental until early 2018 when I sold the house for $55,000. A loss of over $100,000. Today, in an email, my CPA told me I will likely pay capital gains tax on the sale, because of the depreciation I took over the last 10 years. I was shocked to hear this. Does this sound correct?

Thank you for your time and help
Sounds like you need a new accountant.
"Don't trust everything you read on the Internet"- Abraham Lincoln

MichCPA
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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by MichCPA » Thu Aug 09, 2018 2:46 pm

Did you make any improvements to the property that would have been capitalized as something other than a building? I would take a look at your Schedule Es since you have owned the property for the amount of depreciation you have actually claimed.

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by Rowan Oak » Thu Aug 09, 2018 2:51 pm

denovo wrote:
Thu Aug 09, 2018 2:41 pm
Rowan Oak wrote:
Thu Aug 09, 2018 1:57 pm
In 2007 I bought a house to use as a rental property for $157,000. It was a rental until early 2018 when I sold the house for $55,000. A loss of over $100,000. Today, in an email, my CPA told me I will likely pay capital gains tax on the sale, because of the depreciation I took over the last 10 years. I was shocked to hear this. Does this sound correct?

Thank you for your time and help
Sounds like you need a new accountant.
That was my first thought.
Last edited by Rowan Oak on Thu Aug 09, 2018 2:55 pm, edited 1 time in total.

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by Rowan Oak » Thu Aug 09, 2018 2:55 pm

MichCPA wrote:
Thu Aug 09, 2018 2:46 pm
Did you make any improvements to the property that would have been capitalized as something other than a building? I would take a look at your Schedule Es since you have owned the property for the amount of depreciation you have actually claimed.
No improvements just constant maintenance (new roof, multiple plumbing problems fixed, bad foundation issues, etc. etc.).

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by MichCPA » Thu Aug 09, 2018 2:56 pm

Rowan Oak wrote:
Thu Aug 09, 2018 2:51 pm
denovo wrote:
Thu Aug 09, 2018 2:41 pm
Rowan Oak wrote:
Thu Aug 09, 2018 1:57 pm
In 2007 I bought a house to use as a rental property for $157,000. It was a rental until early 2018 when I sold the house for $55,000. A loss of over $100,000. Today, in an email, my CPA told me I will likely pay capital gains tax on the sale, because of the depreciation I took over the last 10 years. I was shocked to hear this. Does this sound correct?

Thank you for your time and help
Sounds like you need a new accountant.
That was my first thought.
This is why you don't break really bad news to a client over email. You can't explain your reasoning well enough and the client gets royally PO'd.

MichCPA
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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by MichCPA » Thu Aug 09, 2018 3:04 pm

Rowan Oak wrote:
Thu Aug 09, 2018 2:55 pm
MichCPA wrote:
Thu Aug 09, 2018 2:46 pm
Did you make any improvements to the property that would have been capitalized as something other than a building? I would take a look at your Schedule Es since you have owned the property for the amount of depreciation you have actually claimed.
No improvements just constant maintenance (new roof, multiple plumbing problems fixed, bad foundation issues, etc. etc.).
A roof and foundation may have been capitalized. If part of the purchase price was allocated to furniture or appliances you may have taken more depreciation. Check your Sch E and have a phone call with the CPA on this one; emails will probably end in (additional) frustration. Check IRS Pub 527 if you have further depreciation questions.

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by niceguy7376 » Thu Aug 09, 2018 3:08 pm

I am still interested to know which part of US this home is located.

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by riverguy » Thu Aug 09, 2018 3:12 pm

niceguy7376 wrote:
Thu Aug 09, 2018 3:08 pm
I am still interested to know which part of US this home is located.
No kidding. How is this possible?

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Rowan Oak
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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by Rowan Oak » Thu Aug 09, 2018 3:14 pm

niceguy7376 wrote:
Thu Aug 09, 2018 3:08 pm
I am still interested to know which part of US this home is located.
terrible foundation. Other houses in the area have fully recovered.

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by Raabe34 » Thu Aug 09, 2018 3:24 pm

Pull out your 2017 depreciation schedule out of the tax return and I think some of these answers might come to light.

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by missingdonut » Thu Aug 09, 2018 4:03 pm

Did you ask the accountant to run the numbers, or is your accountant just giving a quick heads-up to the worst-case scenario?

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by Rowan Oak » Thu Aug 09, 2018 4:05 pm

I spoke with my CPA. Said he looked at the wrong number on my depreciation schedule. There will be an ordinary loss of over 70,000.

Thanks to everyone who replied!
Last edited by Rowan Oak on Thu Aug 09, 2018 6:41 pm, edited 3 times in total.

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by tesuzuki2002 » Thu Aug 09, 2018 4:22 pm

Rowan Oak wrote:
Thu Aug 09, 2018 1:57 pm
In 2007 I bought a house to use as a rental property for $157,000. It was a rental until early 2018 when I sold the house for $55,000. A loss of over $100,000. Today, in an email, my CPA told me I will likely pay capital gains tax on the sale, because of the depreciation I took over the last 10 years. I was shocked to hear this. Does this sound correct?

Thank you for your time and help
How much did you depreciate over 10 years? in general this would be about 1/3 on a straight line approach... so roughly $51K of depreciation with a current basis of around $105K so a sale would generate an additional loss of around $51K...

I'd look at last years taxes and see what your current basis is...

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Re: House I paid 157k in 2007 sold for 55k in 2018 - CPA saying I will owe capital gains tax

Post by denovo » Fri Aug 10, 2018 3:44 pm

Rowan Oak wrote:
Thu Aug 09, 2018 4:05 pm
I spoke with my CPA. Said he looked at the wrong number on my depreciation schedule. There will be an ordinary loss of over 70,000.

Thanks to everyone who replied!
That's not exactly confidence-inspiring.
"Don't trust everything you read on the Internet"- Abraham Lincoln

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