When you sell the property, you have to recapture the depreciation that you have taken (or should have taken) over the years. You have to recapture it whether or not you take the deduction. You are required to recapture the allowable depreciation, meaning the depreciation you could have claimed, not the amount you actually claimed a deduction for.
Rental expenses are not depreciated. You only depreciate the property itself and any capital improvements. Capital improvements that add to the value of your rental property, prolong its life, or adapt it to new uses must be depreciated over a period of time rather than deducted as a current-year expense.
What is rental depreciation and how does it differ from an expense?
Depreciation recapture can cause a significant tax impact if you sell a residential rental property. Part of the gain is taxed as a capital gain and might qualify for the maximum 20-percent rate on long-term gains, but the part that is related to depreciation is taxed at the higher tax rate of 25%.
Now here's some good news. Any passive activity losses that were not deductible in previous years now become fully deductible when a rental property is sold. This can help offset the tax bite of the depreciation recapture tax.
Tax Deductions for Rental Property Depreciation
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