I am not sure if this is the right forum - I am in a tricky situation where I had to pay nearly $19K to a tenant to vacate my condo so I could sell. I have barely broke even but now there will be the depreciation clawback which I will have to pay back.
I have proof of bank payment to the tenant and an agreement if things shoud go well for him, he wd return the money in good faith.
Will I be able to set this off against accumulated depreciation or can I adjust my cost-basis by adding this extra $19K paid to the tenant?
It would be considered a cost to sell (although I will say $19k seems excessive, so you might get a question on that), so doesn’t exactly add to your basis, but it will decrease any gains. Use the worksheets in IRS Pub 523 p523.pdf (irs.gov) to determine if you have any taxable gain and how much depreciation will need to be recaptured.
I have seen opinions both ways on whether the cash you gave the tenant is taxable to the tenant. You probably need to check with your accountant to see if you need to issue a 1099 to the tenant. Issuing a 1099 would provide more documentation for the IRS if you do get a question.
Thank you AJ - the property is in India and paid to an indian citizen who is beyond the tentacles of US tax laws
It is a case of fraud - i engaged a firm which promised to take care of my property and pay me rent for a fee, they would take care of everything. I fell for it. Unknown to me, they collected 2.1million INR from the tenant (a popular concept in india where interest free deposits are taken in lieu of rent and principal returned. collateral is possession of the physical premises. I was the owner and i was kept in the dark). They went bankrupt and the founders in prison. However, tenant would not vacate the property. I had to pay him 1.5 million INR (amounts to $19KUSD). He vacated the condo and I promptly sold it for a nominal gain (around $5k) over the purchase price. However, the $19K usd paid makes it a net loss if not for the depreciation recapture.
