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Level 1
posted Apr 8, 2021 6:09:36 PM

What happens to depreciation recapture tax if I did not use the full deprecation amount to offset my rental property income?

I have a rental property that has a net loss if claiming the depreciation. Let's assume my rental property net income BEFORE counting in the deprecation is 5k/year and depreciation is 20K/year, so my final rental income is -15K/year.

If I sell the property after 5 years, how much depreciation recapture tax should I pay? Is it 20K*5*25% = 25K or 5K*5*25% = 6.25K?

If it's the former, will claiming LESS depreciation (5K/year instead of 20K/year) bring the depreciation recapture tax down?

1 1 617
1 Replies
Level 13
Apr 9, 2021 7:28:24 AM

You will need to report all Section 1250 depreciation recapture.

Keep in mind that this isn't necessarily a separate tax.  This is used in determining the tax rate for this recapture depending on other factors in your return. 

Also keep in mind, that while you may have not "used" all of the depreciation in a specific year as a result of the passive activity rules, any suspended or carried over losses will be utilized in your return in the year you have a complete disposition.