Demolition of Rental House---Depreciation Recapture Question

[borges]

I'm thinking about renting out my old house for a couple of
years. The house is valued by the municipality at 100K and
the land at 100K. The house is in bad condition and has
many structural problems.

May I perform the following scenario: rent the house out
for 2 or 3 years. I would of course depreciate the house
(not the land). I would then demolish the house and build a
new house. I would live in the new house for two or more
years (to obtain the capital gains exclusion benefit)
 and sell it. Am I right in thinking that since
the old house was demolished, there is no recapture of the
depreciation when I sell the new house? It seems too good
to be true.

Thanks for your attention,

Jim
PS: I assume there is no such thing as an accelerated
depreciation schedule for the old house? I have to
depreciate it on a 27.5 year schedule?

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[D. Stussy]

Post by borges
I'm thinking about renting out my old house for a couple of
years. The house is valued by the municipality at 100K and
the land at 100K. The house is in bad condition and has
many structural problems.
May I perform the following scenario: rent the house out
for 2 or 3 years. I would of course depreciate the house
(not the land). I would then demolish the house and build a
new house. I would live in the new house for two or more
years (to obtain the capital gains exclusion benefit)
and sell it. Am I right in thinking that since
the old house was demolished, there is no recapture of the
depreciation when I sell the new house? It seems too good
to be true.

When you demolish the old house, any part of its remaining
basis goes into the LAND component. Therefore, at the time
of the later sale, it's a non-depreciable asset (which can't
be recaptured if it can't be depreciated). You will still
have a capital gain on its sale.

I don't see any substantial tax benefit here.

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