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Here’s a real estate question – I hope it’s an interesting one:

We own a rental property with our daughter (she owns 50% and DH and I own the other 50%).

We have owned the property for about 8 years, reporting income, depreciation etc. on Schedule E. We have been evenly splitting the income, expenses, and deductions between ourselves and our daughter.

Now we are going to buy our daughter out. If I understand correctly, she will report the sale of her half and recapture the depreciation etc.

How do we report the acquisition of the other half of the property? Again, if I understand correctly, that half starts depreciating anew, like a new purchase. Do we keep treating each half of the property separately on our tax returns? I use Turbo Tax Premier and I don’t see where or how this kind of a transaction gets addressed.

I could hand it all over to an accountant, but Turbo Tax has been keeping track of the depreciation over the past 8 years and I would like to keep using TT if I can. I expect our finances to be much simpler over the next few years (except for this property) and I think I can do it myself, if I can find how to make TT digest this information.

Thanks for any help or advice – I am an infrequent poster but a great fan of this board and its resident experts.

Christine
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Is the purchase at fair market value?

If it is then the sale is easy, your daughter reports the sale on her income tax, and it is a purchase to you. Her recaptured depreciation and capital gains are no concern to you.

I am not going to venture into how you handle the new purchase. It would seem reasonable to have two separate depreciation schedules, but logic doesn't always apply to taxes.
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We have owned the property for about 8 years, reporting income, depreciation etc. on Schedule E. We have been evenly splitting the income, expenses, and deductions between ourselves and our daughter.

Now we are going to buy our daughter out. If I understand correctly, she will report the sale of her half and recapture the depreciation etc.

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Yes, but if you've only owned the building for 8 years, the depreciation should have all been straight-line. Therefore, there wouldn't be "recapture" which is reclassifying capital gain to ordinary income, except for any personal property involved. The gain on the real estate should be capital gain. However, the depreciation amount, though still treated as part of the capital gain, is a "nonrecaptured Section 1250 gain" and may have a maximum tax rate of 25% instead of 15%.

If she, like you, has been using Turbo Tax, it can do this quite well; but you do have to eyeball-check the flow of the figures from Form 4797 to Schedule D to the tax computation worksheet for capital gains & qualified dividends.

How do we report the acquisition of the other half of the property? Again, if I understand correctly, that half starts depreciating anew, like a new purchase. Do we keep treating each half of the property separately on our tax returns? I use Turbo Tax Premier and I don’t see where or how this kind of a transaction gets addressed.

Yes, on your depreciation schedule, you just add a new asset, for the 2nd half of the building. The part attributable to land, of course, is not depreciated.

Bill
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How do we report the acquisition of the other half of the property? Again, if I understand correctly, that half starts depreciating anew, like a new purchase. Do we keep treating each half of the property separately on our tax returns?

Yep - you treat it like an additional property acquisition. Add a second building (and it's associated non-depreciable land) to your depreciation schedule, with an acquisition date of the date you complete the purchase.

However, you can treat the ordinary income and expenses as a single property. You'd just have two assets on the depreciation schedule for the building. So it takes just one column on your schedule E.

I'd guess that you tell TT that you acquired an additional asset for the property that needs to be depreciated. But I'm not a TT user, so I really have no idea how to do that exactly.

--Peter
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Thanks folks!!!

Christine
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I'd guess that you tell TT that you acquired an additional asset for the property that needs to be depreciated. But I'm not a TT user, so I really have no idea how to do that exactly.

When you enter a new depreciable asset in TT, you have to link it to an activity, in this case, your rental.

Ira
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Thanks Ira!
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