Found A Deal... But Seller Has Depreciated The Asset Too Much

[Chris Pike]

I have found a deal that I would like to wholesale in Phoenix, AZ.  I want to help out the Seller as best I can with her situation, although I am in need of some advice in how to best assist her.

The owner is interested in selling the property, and is willing to sell it at a price that I feel is a great deal.  Although, she is concerned that she has owned it for so long as a rental, and has depreciated the asset so much, that she feels her tax bill on the captial gains will be so high that she will actually lose money when she sells the property.

The owner inherited the property back in 1979 with no mortgage on it.  Then she proceeded to depreciate the asset for the full 27.5 years available.

Any tips or ideas to help her out?

[Dan Schwartz]

@Chris Pike you keep referring to it as a "property." Of what type? Because if it's a run-of-the-mill 40+ year-old house, I wouldn't be surprised if her basis was <$50,000. If she depreciated $40,000 of that (excluding the land), then she owes the IRS $10,000. Her numbers will be different of course, but fully depreciating an AZ property from 1979 basis should not be a huge tax bill relative to the gain she will certainly realize. If there have been extensive upgrades that are on a different depreciation schedule, then you are less likely to be wholesaling it. It can't be land of any kind, no matter how valuable, because she wouldn't have depreciated that. Or maybe this is some dilapidated mansion screaming for a million-dollar makeover?

Maybe she's just shocked, as so many are, that there is such a thing as "depreciation recapture tax"? After all, investing in real estate is tax-free! Rich Dad told me this is 0% tax investing! Until the bill comes due, of course......