# IRS Property Depreciation Expense and Depreciation Tax when resident overseas HELP!



## Nivie (Apr 22, 2021)

Hi
So we just sold property in the States. Owned 10 years, last 5 were rented while we were resident here in the UK on a spouse visa, now ILR. We are reinvesting to buy our first home here in the UK.
We calculated the calculated capital gains we were likely to pay using a H&R calculator and same for HMRC. Will claim double tax relief.

Our USA CPA has just informed us that she should or could have claimed Depreciation Expense on the real estate during its time providing a rental income. This was never claimed on her returns. Regardless, it now appears IRS will calculate the property depreciation and use to generate a depreciation expense tax, basicaly anther 25% of the difference between its depreciation and its selling value, (on top of her capital gains).
Investors can use 1031 Tax Exchange to avoid this tax and any gains but pretty certain this is not possible as we are reinvesting this in our new property here in the UK. In effect we will be penalised for not being able to use a 1031 tax exchange.

So my question is, as we were resident overseas here in the UK during the entire period the property was being used to generate a rental income, is Depreciation Expense relevant and more importantly, will the difference between depreciation and selling price mean another tax over and above the capital gains?

This is all new to us.

Thanks


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## Bevdeforges (Nov 16, 2007)

Things may have changed in recent years, but back when I was keeping up with US tax regulations it was common knowledge (well, included in my tax classes at university) that for rented property you "must" take depreciation each year that it is rented out and that the amount of depreciation is then taken against the basis of the property (i.e. it reduces the basis of the property). On sale, the reduced basis of the property is what determines the amount of the capital gain.

I haven't heard of a separate tax on the depreciation not taken - but as far as I know your residence outside the US has absolutely no bearing on how any tax is imposed.


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## Nivie (Apr 22, 2021)

Bevdeforges said:


> Things may have changed in recent years, but back when I was keeping up with US tax regulations it was common knowledge (well, included in my tax classes at university) that for rented property you "must" take depreciation each year that it is rented out and that the amount of depreciation is then taken against the basis of the property (i.e. it reduces the basis of the property). On sale, the reduced basis of the property is what determines the amount of the capital gain.
> 
> I haven't heard of a separate tax on the depreciation not taken - but as far as I know your residence outside the US has absolutely no bearing on how any tax is imposed.


Thanks. Unfortunately we did not know. Not a lot we can do except find a CPA to file this year for us and pay what is owed ):


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## Bevdeforges (Nov 16, 2007)

Not sure about finding a CPA but you could look for a Enrolled Agent. This is a category of tax preparer certified and registered with the IRS. Outside the US, there are some accountants who train and register as enrolled agents, whether or not they are CPAs.

Take a look at the website for the National Association of Enrolled Agents for more information and for a search page that will give you enrolled agents outside the US: https://taxexperts.naea.org/listing/results.php (The list of countries is on the left side of the page.)


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## 255 (Sep 8, 2018)

@Nivie -- Your question: "So my question is, as we were resident overseas here in the UK during the entire period the property was being used to generate a rental income, is Depreciation Expense relevant and more importantly, will the difference between depreciation and selling price mean another tax over and above the capital gains?"

Your residence in the UK is immaterial to whether you take depreciation on a rental property. Depreciation is normally taken on business property, including rental real estate, and as @Bev said, any depreciation will be "recaptured" on the sale of the property, by adjusting your basis. The beauty of depreciation is that it can reduce your income, over and above your net income/loss (of course RE is considered passive, so unless you qualify, as a real estate professional, you'll only be able to offset other "passive" income.) Whether it makes sense to file amended returns, to capture depreciation in past years, is just a matter of doing the calculations. It is not unusual for the IRS to impute depreciation, if it was "reasonable" to take it (it was.) You can still file amended returns (1040-X,) to capture the depreciation deductions for the last three years.

So bottom line, the depreciation is relevant, and you'll have to adjust your basis for calculating your capital gains, whether you took the depreciation deductions in earlier years (or file amended returns to capture it,) or not. I would certainly calculate the depreciation and probably file amended returns for the last three years. There is no extra 25% tax.

You are right about a 1031 exchange. They are used for "like-kind" property. So if you sold the property and upgraded to a different rental property, in the U.S., you'd be able to "roll" any potential gain into the new property, deferring the gain. Unfortunately, as your surmised, a U.S. property cannot be "exchanged'" for a property in the UK. Also, a rental property cannot be exchanged for a personal residence (other rules apply.)


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## Nivie (Apr 22, 2021)

Thanks everyone. Will digest your comments. If the annual depreciation expense exceeded our income tax owed each financial year would we have received a refund on the difference? If not then would there be any benefit amending and adding the depreciation?
What line would we need to add this on amendments (we use Inuit)
Thanks


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## Bevdeforges (Nov 16, 2007)

Nivie said:


> If the annual depreciation expense exceeded our income tax owed each financial year would we have received a refund on the difference? If not then would there be any benefit amending and adding the depreciation?


Actually, you should receive a refund if you amend your returns. And just for information's sake, I believe the law on this is that, on the sale of the property, there is recapture of all depreciation that was or could have been taken. It's not a choice - the IRS will impute it.


> What line would we need to add this on amendments (we use Inuit)


Basically, you increase the expenses for the rental property on whatever line or form you declared the rental income and related expenses.


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## 255 (Sep 8, 2018)

@Nivie -- In most cases, yes you should get a refund, on your amended returns. However there are two issues you need to consider:

a. Remember what I said above -- RE is considered passive, so if you go into the loss category, you can only off-set passive income (unless, of course you have REP status.)

b. Since you are living overseas -- I'll assume you claimed the FEIE or the FTC. If so, your actual tax may have been minimal enough to not make it "worth the effort" to amend.

In any event, I'd still do the calculations to determine if it is "worthwhile" to you. You may determine that the "juice isn't worth the squeeze," so you may just submit your return with the imputed depreciation and leave it at that.

I know nothing about "Inuit," but depreciation for privately held rental property is usually listed on line 18 of schedule E: https://www.irs.gov/pub/irs-pdf/f1040se.pdf . Cheers, 255


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## Nivie (Apr 22, 2021)

255 said:


> b. Since you are living overseas -- I'll assume you claimed the FEIE or the FTC. If so, your actual tax may have been minimal enough to not make it "worth the effort" to amend.




Yes, you are correct and I agree.


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