Rental - recapture tax treatment - when can not deduct loss due to high income

[bamangan]

Hello,

Here is my situation.

I have a renal property. Rental - minus expenses - minus depreciation is showing a loss, let's say $5,000. Assume exactly 5,000 was my deprecation. Assume the same situation for three years, aka 15,000 loss due to depreciation+expenses.

Given that this is passive income for me and I am a high earner, I am not able to take losses against my income.

When I sale the property, and say if I gained 50K, how does the recapture works? I could not take loss against my income, so I assume I can get that money from the recapture tax.

That is, 
Gain:     50,000
+Depreation recpature: $15,000
Total gain: 65,000
Minus: 15,000 (depreciation, which I could not take)
Total gain for Taxes: 50,000

Is this correct?

[Mike9241 · Accepted solution]

sort of, the passive loss you could not deduct becomes an ordinary deduction which will show up on schedule E. 

 your gain is sales price net of selling expenses less the cost reduced by depreciation.

example

net sales price 100

cost 50

depreciation 15

gain 100 - (50-15) = 100-35=65

in this example you will have a 15 loss from the passive suspended loss allowed a section 1250 gain of 15 and a long-term gain (assuming holding period over 1 year) of 50

[Carl]

Basically, in the tax year you sell the property, all of your suspended losses are "released" and are fully deductible in the year you sell.  That helps to reduce the amount of your gain on the sale, that is taxable.