Depreciation Recapture with PAL - Rental Property

[Charlie Dunkelblond]

Hi, I'm selling a rental property with a cost basis of 390K for 400K. I have PAL of 140K which I have not been able to deduct because of my income bracket. Of those 140K in PAL, 100K is cumulative depreciation and 40K are the expenses of running the rental: HOAs, legal fees, mortgage interest, property taxes, etc. I have never been able to deduct any of the expenses on this rental

If I understand correctly on how depreciation recapture works, I will have the following computation: 10K of profit on the sale + 100K of depreciation recapture - 140K of PAL = 30K of losses I can deduct on my 2022 tax return against capital gains or carry forward for another 15 years. In my case the depreciation recapture will be a "wash" because I have never benefited from it from a Tax point of view

Am I correct? This is a qualified sale so I should be able to deduct all the losses. Thanks          

[Mike9241]

actually, you have a $110K gain on sale the $390k cost must be reduced by the $100K of depreciation.  of the $110k gain, $100k is taxed as depreciation recapture, and $10K is taxed as a long-term capital gain. the complete taxable disposal allows you to deduct the PAL carryforward. so in the end you are correct. you'll have $30k to offset other income.  depending on your tax bracket in the year of sale the depreciation deduction might be of benefit.  say you're in the 35% bracket. that $140K in PAL will first reduce the taxable income in that bracket and then the next lower and so on. tax on depreciation recapture - section 1250 - is a maximum of 25%.

[Charlie Dunkelblond]

Thanks for the detailed explanation! 

[Critter-3]

The released prior unused PAL will be reported on the Sch E  and is not part of the sale on the form 4797 or Sch D.