See: <a rel="nofollow" target="_blank" href="
http://www.investopedia.com/terms/d/depreciationrecapture.asp">http://www.investopedia.com/terms/d/d...>
It may be best explained by example.
You bought a house for $100,000. You rented it out for 2 years, reporting the rental activity (Schedule E) on your tax return. You claimed $6000 of depreciation (deduction), on your taxes, while you rented it out.
You then sold the house for $125,000. Your cost basis is no longer $100,000. It's 100,000 minus 6000 = $94,000. You do not have a $25,000 capital gain. You have a $31,000 gain broken into two pieces; $25,000 long term capital gain and $6000 depreciation recapture. They are taxed at different tax rates.
Depreciation explained: <a rel="nofollow" target="_blank" href="
http://www.investopedia.com/terms/d/depreciation.asp">http://www.investopedia.com/terms/d/depreciati...>
