There is no loss on depreciation per se, but upon selling the property the improvements you made will increase your basis. The allowed depreciation would be considered unrecaptured 1250 gain if sold more than the adjusted basis. To illustrate, If a property was initially purchased for $100,000, and the owner claims a depreciation of $10,000, the basis for the property is considered to be $90,000. If the property is subsequently sold for $180,000, the owner has received an overall gain of $90,000 over the basis value. Since the property has sold for more than the basis that had been adjusted for depreciation, the initial gains are recaptured based on the original purchase price of $100,000. This makes the first $10,000 of the profit subject to the unrecaptured section 1250 gain, while the remaining $80,000 is considered regular long-term capital gains. With that result, $10,000 would be subject to the higher capital gains tax rate of up to 25%. The remaining $80,000 would be taxed at the long-term capital gains rate of 15%.
