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Fldavem1
Level 2

Selling a rental - depreciation recapture

Perhaps this is simple and I'm making it too complicated, but I am selling a rental property and over 17 years I've depreciated it about 100k.  My tax rate has grown from the 12% to 22% over the years.  My turbo tax effective tax rate has been about 7-12% yearly.  Is the IRS really asking me to pay back 25% of the depreciation even when it was really only lowering my AGI by 15% of the depreciation?  Am I mixed up in thinking I got a 15% benefit over the years but now I'm required to pay back more than I used?

1 Best answer

Accepted Solutions
KrisD15
Expert Alumni

Selling a rental - depreciation recapture

Perhaps the Capital Gain is being taxed at 25%

Recaptured depreciation is tax as ordinary income on this year's (the year the depreciation is re-captured) return, at whatever tax bracket you are in for that same year. 

 

 

EXAMPLE:

 

  • "The first thing you will need is the cost basis of the property, in our prior example $50,000. This should have been computed at the very beginning when you started taking depreciation. Generally, this amount is somewhat close to what you originally paid for the property.
  • Next you need to compute the total depreciation that you took (or that you should have been taking). Say, in our case, we took a total of $10,000. If you had a professional prepare your taxes this is probably included as a schedule in your last year’s tax filing. A lot of the online tax software programs miss this information.
  • Then you subtract the amount of depreciation taken (or that should have been taken) from the original cost basis. This is known as the “adjusted cost basis” of your property, in our example it would be $40,000.
  • Next you need the amount you sold the property for minus any fees or commissions. This is known as your “net proceeds.” In our example, say we sold it for $60,000 and paid $5,000 in selling costs, so our net proceeds would be $55,000.
  • Take the net proceeds figure and subtract from it the adjusted cost basis: $55,000-$40,000=$15,000. This is the amount of gain you have realized.
  • Compare your realized gain with your depreciation expense: $15,000>$10,000. The lower of the two figures is the amount the IRS considers subject to depreciation recapture at your ordinary income tax rate. In this case, $10,000 is subject to depreciation recapture at your ordinary income rate. The remaining $5,000 is taxed at the capital gains rate."

Kiplinger Tax Link

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3 Replies
KrisD15
Expert Alumni

Selling a rental - depreciation recapture

Yes, it will be taxed as income in the year of recapture, the year it is sold.

 

You could only defer it with a 1031 exchange, and it is not recaptured if left as an inheritance. 

 

TurboTax explains "Like-Kind Exchange"

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Fldavem1
Level 2

Selling a rental - depreciation recapture

But not really just as income, as 25% rate, correct? More than the rate I've been benefiting at.

KrisD15
Expert Alumni

Selling a rental - depreciation recapture

Perhaps the Capital Gain is being taxed at 25%

Recaptured depreciation is tax as ordinary income on this year's (the year the depreciation is re-captured) return, at whatever tax bracket you are in for that same year. 

 

 

EXAMPLE:

 

  • "The first thing you will need is the cost basis of the property, in our prior example $50,000. This should have been computed at the very beginning when you started taking depreciation. Generally, this amount is somewhat close to what you originally paid for the property.
  • Next you need to compute the total depreciation that you took (or that you should have been taking). Say, in our case, we took a total of $10,000. If you had a professional prepare your taxes this is probably included as a schedule in your last year’s tax filing. A lot of the online tax software programs miss this information.
  • Then you subtract the amount of depreciation taken (or that should have been taken) from the original cost basis. This is known as the “adjusted cost basis” of your property, in our example it would be $40,000.
  • Next you need the amount you sold the property for minus any fees or commissions. This is known as your “net proceeds.” In our example, say we sold it for $60,000 and paid $5,000 in selling costs, so our net proceeds would be $55,000.
  • Take the net proceeds figure and subtract from it the adjusted cost basis: $55,000-$40,000=$15,000. This is the amount of gain you have realized.
  • Compare your realized gain with your depreciation expense: $15,000>$10,000. The lower of the two figures is the amount the IRS considers subject to depreciation recapture at your ordinary income tax rate. In this case, $10,000 is subject to depreciation recapture at your ordinary income rate. The remaining $5,000 is taxed at the capital gains rate."

Kiplinger Tax Link

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"

View solution in original post

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