Land Contracts and Depreciation

[Richard Patrie]

Wondering if any CPAs out here can chime in.

I'm in the midst of selling a few of my SF houses to my tenants on a land contract.

For the past couple years I have been taking depreciation while they were rented.

After the contract is signed, I will still hold the title. Can I continue to depreciate the property until the final payment is made and the deed is transferred? If so, I would think that I'd be taxed on the total sale price less the cost basis, less depreciation taken. 

So in this example, I buy a house for 100K. Rent it for 2 years and sell it on a 10 yr land contract for 140K. 12 years of depreciation would be $43,632. Once the deed is transferred, the net proceeds would be 140K - (100K-$43,632) = $83,632. Of this, 43,632 would be taxed as recaptured depreciation, and the remaining $40,000 would be taxed as long-term capital gain. (I would count any interest received as normal income)

Or is this completely wrong and the IRS considers this an installment sale, regardless if I retain title, and tax me each year and not allow depreciation. 140K - $100K = 40K/12 yrs = $3,333 per yr in taxable income over 12 yrs.

I figured that this is something that has been seen before on BP. 

Thanks!

[Michael Plaks]

@Richard Patrie

Two people can never take depreciation on the same property, only the owner can. Which one is considered the owner is a tricky legal question, and it depends on the details of your agreement and your state law.

For tax purposes, the owner is not necessarily the one who holds the title but the one who has "burdens and benefits" of ownership. For example:

• can your buyer resell this property?
• can your buyer lease this property?
• can your buyer modify this property?
• who is responsible for taxes and insurance?
• who is responsible for repairs and maintenance?

These and similar questions are not leading to a black-and-white answer. Sometimes it is subjective. It really should be discussed and agreed upon during the closing.