What are the tax penalties/repayment when I sell my rental property? How can I avoid penalties?

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TomYoungAnswer

Alumni - Champ

The direct answer to your direct question - now that we know that you're talking about depreciation recapture - is "you can't" except if you properly do a Sec 1031 ("Starker") exchange.

https://www.washingtonpost.com/realestate/starker-exchange-lets-you-defer-capital-gains-taxes-on-inv...

Of course that really doesn't "avoid" the recapture, but it does delay it.

Tom Young

VolvoGirl

Level 15

Tax penalties? Don't think there are any. You have to pay tax on the recaptured depreciation and on any gain if you sell it for more.

res0me5hAuthor

Level 2

"Penalties" was obviously an incorrect word. I should have said repayment against prior year depreciation deductions.... Thanks.

DoninGA

Level 15

What penalties or repayment are you referring to? Did you not report the rental property income or depreciation for prior tax years?

res0me5hAuthor

Level 2

So the only 'relief' I may get is if I use the rental as my primary residence for 24 months?

TomYoung

Alumni - Champ

Depreciation will still be recaptured.

res0me5hAuthor

Level 2

Thanks, Tom! Your info was REALLY helpful!

TomYoung

Answer

Alumni - Champ

The direct answer to your direct question - now that we know that you're talking about depreciation recapture - is "you can't" except if you properly do a Sec 1031 ("Starker") exchange.

https://www.washingtonpost.com/realestate/starker-exchange-lets-you-defer-capital-gains-taxes-on-inv...

Of course that really doesn't "avoid" the recapture, but it does delay it.

Tom Young