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Started By
Message
Selling an asset, Depreciation is taxable income?
Posted on 4/15/22 at 11:53 pm
Posted on 4/15/22 at 11:53 pm
Short story.
Had a laundromat, bought it for $75k.
Depreciated assets (washers/dryers/etc) to the tune of $50k over 7 years.
Sold laundromat for 100k
Expecting to pay cap gains tax of on $25k
Accountant says I have to “income tax” from the sale of $75k
Seems wrong, why is it not at cap gains rate?
Had a laundromat, bought it for $75k.
Depreciated assets (washers/dryers/etc) to the tune of $50k over 7 years.
Sold laundromat for 100k
Expecting to pay cap gains tax of on $25k
Accountant says I have to “income tax” from the sale of $75k
Seems wrong, why is it not at cap gains rate?
8
Posted on 4/16/22 at 5:08 am to Kujo
Im no accountant.
But you depreciated against taxable income for all those years.
Now you have received the taxable income back with the sale of the asset.
You arent claiming the gain.
You are claiming the depreciation back.
But you depreciated against taxable income for all those years.
Now you have received the taxable income back with the sale of the asset.
You arent claiming the gain.
You are claiming the depreciation back.
Posted on 4/16/22 at 5:35 am to Kujo
Your accountant is right.
The depreciation reduced your basis to $25,000. You’ve been getting tax deductions for it this whole time.
The depreciation is “recaptured” as ordinary income up to the amount of the gain on sale. You should have $50,000 of ordinary gain and $25,000 of 1231 gain which is taxed at the capital gains rates.
The depreciation reduced your basis to $25,000. You’ve been getting tax deductions for it this whole time.
The depreciation is “recaptured” as ordinary income up to the amount of the gain on sale. You should have $50,000 of ordinary gain and $25,000 of 1231 gain which is taxed at the capital gains rates.
Posted on 4/16/22 at 7:44 am to Kujo
Posted on 4/16/22 at 9:53 am to Kujo
He/she is right but dude dont let it go without verifying your sales agreement. No one pays more for depreciable assets so that large of gain is wild on equipment. Make sure the proceeds are not allocated to goodwill as well. If so, that's cap gain rates for goodwill. IE - diff between fair market value of equipment and sales price.
Posted on 4/16/22 at 11:02 am to Tigerlandlegend2000
I presume the laundromat included the real estate. Not just the equipment. I presume the gain is on everything.
Posted on 4/16/22 at 11:20 am to meansonny
Land is not depreciated?
Posted on 4/16/22 at 12:10 pm to Kujo
It’s kind of like a true up in a way.
You took ordinary expense for “depreciation”. Turns out the asset didn’t depreciate as much as you said it did so you pick up ordinary income to make up for the expense you took.
If you sell the asset for more than you bought it for, then the amount in excess of your cost will be capital gain.
You took ordinary expense for “depreciation”. Turns out the asset didn’t depreciate as much as you said it did so you pick up ordinary income to make up for the expense you took.
If you sell the asset for more than you bought it for, then the amount in excess of your cost will be capital gain.
Posted on 4/16/22 at 4:42 pm to BestBanker
quote:
Land is not depreciated?
Nope.
Buildings are due to wear and tear, but land doesn't get used up.
Posted on 4/16/22 at 7:23 pm to Kujo
My perception is too many people claim the tax benefits of depreciation without understanding the potential of a big capital gains tax penalty in the future. Which is not to say that they shouldn't consider the deduction.. but if your tax bill is likely to be larger in the future then you should be more reluctant.
Posted on 4/16/22 at 8:40 pm to Kujo
Good thing you have an accountant.
Posted on 4/17/22 at 7:19 am to Kujo
quote:As long as he/she isn't saying the entire thing is ordinary income then yes, that is correct.
Accountant says I have to “income tax” from the sale of $75k
If I had a nickel for every time I had to ruin someone's day on this topic...and I'm not even a CPA.
Posted on 4/17/22 at 8:52 am to Niner
I think I understand where he is coming from. He paid $75k for a business that included $50k in depreciable assets.
Now, the business is sold for $100k with assets that are valued at $0.
If he called out a $1000 of value as an asset to the buyer in the purchase documentation, and the buyer was cool with that, would he not owe only ordinary income on the $1000, and capital gains on $74k of increased business value?
Now, the business is sold for $100k with assets that are valued at $0.
If he called out a $1000 of value as an asset to the buyer in the purchase documentation, and the buyer was cool with that, would he not owe only ordinary income on the $1000, and capital gains on $74k of increased business value?
Posted on 4/18/22 at 12:23 am to HubbaBubba
quote:
If he called out a $1000 of value as an asset to the buyer in the purchase documentation, and the buyer was cool with that, would he not owe only ordinary income on the $1000, and capital gains on $74k of increased business value?
Usually there’s a purchase price allocation that both the buyer and seller have to agree to and file matching forms with the IRS.
Buyer wants more allocated to Fixed assets (more depreciation to take). Seller wants less allocated to Fixed assets (less depreciation recapture and thus ordinary income).
But yes that’s how it works. Most I see are based on Book Value of the asset.
This post was edited on 4/18/22 at 12:24 am
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