Depreciation Recapture

[moolelechip]

We sold our only residential rental incurring a LT gain. Since this is not a business, are we subject to the recapture tax? Hers the details:

net proceeds  221955

cost basis         72548

lt gain              149407

accum dep.     107000

I am trying to pay an estimate today. Dont want to send an extra 25k if I dont have to!

Thanks.

[moolelechip]

Bummer. Thank you.

[AmeliesUncle]

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@moolelechip wrote:

net proceeds  221955

cost basis         72548

lt gain              149407

accum dep.     107000

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If the Cost was only $72,548, how did you have $107,000 of depreciation?

Or did you mean the Cost was $177,548, and after the $107,000 of depreciation your Adjusted Basis was $72,548?

[moolelechip]

No, the tax basis I provided is after accumulated depreciation.

[Opus 17]

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@moolelechip wrote:

Bummer. Thank you.

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Assuming constant tax rates, you got a 22% deduction each year for depreciation, which essentially says that the home is being "used up" by its business use.  When you sell the home for more than the adjusted basis, that proves the home's value wasn't "used up" and you have to pay back the depreciation.  However, that 22% (about $1500 in tax savings per year) was money in your pocket for the past 16 years that could have earned interest, been reinvested, or been spent in interesting ways that you could not have afforded otherwise.  And because of inflation, the roughly $23,000 you have to pay back now is worth a lot less in real terms than the money you saved in tax in the past.  So depreciation is still a pretty good arrangement, even if it has to be paid back.