When you sell a rental property, you must claim all income and expenses for the rental during the year of the sale, including depreciation. You receive the entire annual depreciation expense for the property in the year of the sale, regardless of the date you actually sell the property. In addition, you must calculate your depreciation expense for the year first to properly report the sales transaction on your tax return.
1. Calculate your basis for depreciation. Your basis for depreciation equals your initial adjusted basis in the rental property, minus the accumulated depreciation expense you have claimed since you placed the property in service.
2. Obtain the instructions for IRS Form 4562 on the IRS's website. Locate the depreciation tables are in the back of Form 4562 instructions and look for Table C. Table C lists the straight-line depreciation percentages for property with a 27.5 year recovery period. Rental property must be depreciated over 27.5 years.
3. Find the year of service for the rental property in the “Year” column and then scroll over to the number that corresponds to the month the rental property was first placed in service. Note the percentage shown on the table for the year and month the property was first available for rent.
4. Multiply your adjusted basis by the percentage shown in the table. The result is your depreciation expense for the year.
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