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xanthine99
Level 2

Can depreciation recapture on rental property change your federal income tax bracket?

I am planning for the sale of a rental property and estimating that a significant amount of the long term gain will actually be considered depreciation recapture and thus taxed at an ordinary income rate up to 25%.   I am wondering however whether this amount of depreciation recapture will also contribute to the calculation of what federal income tax bracket I fall into for the purpose of determining long term capital gains rate for the rest of the gain on the sale.  Because the depreciation recapture is significant, I am concerned that my long term capital gains rate for the sale could be bumped up to a higher bracket if the depreciation recapture amount contributes to the determination of my federal income tax bracket.   Any experience or advice in this area would be highly appreciated.  Thank you!

2 Best answer

Accepted Solutions
Critter-3
Level 15

Can depreciation recapture on rental property change your federal income tax bracket?

 I am wondering however whether this amount of depreciation recapture will also contribute to the calculation of what federal income tax bracket I fall into for the purpose of determining long term capital gains rate for the rest of the gain on the sale. Yes it will. 

 

Because the depreciation recapture is significant, I am concerned that my long term capital gains rate for the sale could be bumped up to a higher bracket if the depreciation recapture amount contributes to the determination of my federal income tax bracket. Yes it does.  

 

The taxes will be calculated using the Qualifying Dividends & Cap Gain tax worksheet where  the ordinary income (including the depreciation recapture) are  "busted out" and the tax is calculated differently however your total AGI will determine which tax brackets you end up using ... if you like you can check out the worksheet yourself here: https://www.irs.gov/pub/irs-pdf/i1040sd.pdf

 

 

View solution in original post

Critter-3
Level 15

Can depreciation recapture on rental property change your federal income tax bracket?

To add to Carl's post ... the depreciation recapture is taxed at a max of 25% and the cap gains at a max of 15% or 20% and the ordinary income at the effective tax rate (since we are on a graduated tax system)  so the total tax paid could be lower than any of those caps.  If your income is high enough that you are at the 20% cap gain limit you may also be hit with the NIT tax of 3.8% so review the return and all the worksheets carefully.

 

If you use the downloaded program you can do some "what if / test " returns ...

 

If you want to play around with different figures and tax scenarios without affecting your original return you can

In the TurboTax CD/Download software by creating a test copy:

  1. Open your return in TurboTax.
  2.  From the File menu, choose Save As.
  3. Give the copy a new name to distinguish it from the original (for example, by adding "Test" or "Example" to the file name).
  4.  Click Save. You are now safely working in the test copy and anything you do here will not affect the original.

In TurboTax Online, you'll have to create a test account separate from your regular TurboTax account and create a test return there. We recommend adding "test" or similar to your User ID so you can easily distinguish it from your actual account.

 

Or use the WHAT IF tool: 

- Click Forms Icon (upper right of screen) or Ctrl 2 (forms view)

- Click on the Open Form Icon

- In the “Type a form name..” area type What-If (with the dash), click on the name of the worksheet - click on Open Form

- You will see the worksheet on the right side of the screen; enter the information right into the form

- To get back to interview mode - click on the Step-by-Step Icon (upper right of screen) or Ctrl 1

 

View solution in original post

5 Replies
Critter-3
Level 15

Can depreciation recapture on rental property change your federal income tax bracket?

 I am wondering however whether this amount of depreciation recapture will also contribute to the calculation of what federal income tax bracket I fall into for the purpose of determining long term capital gains rate for the rest of the gain on the sale. Yes it will. 

 

Because the depreciation recapture is significant, I am concerned that my long term capital gains rate for the sale could be bumped up to a higher bracket if the depreciation recapture amount contributes to the determination of my federal income tax bracket. Yes it does.  

 

The taxes will be calculated using the Qualifying Dividends & Cap Gain tax worksheet where  the ordinary income (including the depreciation recapture) are  "busted out" and the tax is calculated differently however your total AGI will determine which tax brackets you end up using ... if you like you can check out the worksheet yourself here: https://www.irs.gov/pub/irs-pdf/i1040sd.pdf

 

 

Carl
Level 15

Can depreciation recapture on rental property change your federal income tax bracket?

Yes, it's possible. Recaptured depreciation is added to your AGI in the tax year of recapture. However, that recaptured depreciation itself is taxed as ordinary income anywhere from 0% to a maximum of 25%. So even if the AGI increase puts you in a higher tax bracket, that recaptured depreciation will not be taxed at more than 25%.

 

Critter-3
Level 15

Can depreciation recapture on rental property change your federal income tax bracket?

To add to Carl's post ... the depreciation recapture is taxed at a max of 25% and the cap gains at a max of 15% or 20% and the ordinary income at the effective tax rate (since we are on a graduated tax system)  so the total tax paid could be lower than any of those caps.  If your income is high enough that you are at the 20% cap gain limit you may also be hit with the NIT tax of 3.8% so review the return and all the worksheets carefully.

 

If you use the downloaded program you can do some "what if / test " returns ...

 

If you want to play around with different figures and tax scenarios without affecting your original return you can

In the TurboTax CD/Download software by creating a test copy:

  1. Open your return in TurboTax.
  2.  From the File menu, choose Save As.
  3. Give the copy a new name to distinguish it from the original (for example, by adding "Test" or "Example" to the file name).
  4.  Click Save. You are now safely working in the test copy and anything you do here will not affect the original.

In TurboTax Online, you'll have to create a test account separate from your regular TurboTax account and create a test return there. We recommend adding "test" or similar to your User ID so you can easily distinguish it from your actual account.

 

Or use the WHAT IF tool: 

- Click Forms Icon (upper right of screen) or Ctrl 2 (forms view)

- Click on the Open Form Icon

- In the “Type a form name..” area type What-If (with the dash), click on the name of the worksheet - click on Open Form

- You will see the worksheet on the right side of the screen; enter the information right into the form

- To get back to interview mode - click on the Step-by-Step Icon (upper right of screen) or Ctrl 1

 

xanthine99
Level 2

Can depreciation recapture on rental property change your federal income tax bracket?

Thank you for the prompt and thorough response, much appreciated!

xanthine99
Level 2

Can depreciation recapture on rental property change your federal income tax bracket?

Thank you Carl for the additional confirmation and response to my question and this discussion.  Really appreciate it!

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