Deprecation recapture on roofs and other improvements

[Mark Patel]

I have a question on deprecation recapture and the tax consequence.  When you depreciate a expense like a roof then sell the property.  It seems that the roof expense become a capital gain since you have to add the depreciation recapture back in to the cost bases.   

 The best way to ask it is to provide a made up scenario to highlight the point above. 

Baseline assumptions for this example:

-Investment single family home is purchased for $100k in year 1 and sold for $100K in year 10

-The home was 100% rent ready on the day of closing (no rehab needed) except for 1 item that is listed below. The tenant moved in on day 1 and stayed for 10 years.

-The home is depreciated at $1k per year or $10K deprecation over the 10 year of ownership. This amount is just for example purposes for easier math.

-The rental property made Zero dollars each year in profit. The rental income and expenses were equal and on the tax return the net effect is the depreciation loss that is taken each year.

-Upon sale in year 10 there is no 1031 exchange and the owner will pay capital gain tax if any.

- You can not offset real estate loss from you regular W2 income for the 10 years due to tax rules (you make too much in W2 income, not real estate professional, etc etc)

Scenario #1

After purchasing the rental home the roof was replaced at $5K. The $5K was written off as an expense for that year. Again this is just an example as this could be a $5K roof or a $500 stove etc. Since the assumption is that in all 10 years the property makes $0 dollars profit then this $5k is written off and is carried forward year over year until there is a profit or property is sold

Scenario #2

After purchasing the rental home the roof was replaced for $5K. The $5K was depreciated over 10 years or $500 / yr on the tax return. Again the numbers are just an example to make the math easier and the actual deprecation length of 10 years is just for easy math in this case.

Question:

In year 10 when the property is sold what is the cost bases and what is the capital gain that will be taxed when filing the tax return for both scenario above? Below is my analysis and need to understand where I might be incorrect:

Scenario #1: $100K purchase - $5K expense that has been carried forward year after year + $10k home depreciation recapture - $100 sale price = $5k in capital gain in year 10 upon sale of the property.

Scenario #2: $100K purchase + $10K deprecation + $5K roof deprecation recapture - $100K sales price = $15K in capital gain in year 10 upon sale of the property.

Thanks