I sold a rental property in2020. It was fully depreciated, thus the entire sales price was subject to capital gains tax. However, Turbo Tax assigned that amount to my ordinary income total. Did I do something wrong or is that the way it is done? In addition, I got a letter from y the IRS saying I had overpaid 2020 taxes and sent me a refund. Any enlightenment?
Sorry but the depreciation taken must be recaptured as ordinary income and only the capital gain left over after the recapture is taxed at the cap gain rate. Review the Sch D, form 4797 and the cap gain worksheets.
Q. Did I do something wrong or is that the way it is done?
A. That's the way it's done.
It's a little misleading/confusing. Depreciation recapture is classified as a section 1250 capital gain. Despite the capital gain terminology, it is taxed as ordinary income , but not more than 25% Since it's a capital gain, it's included in the gain on line 11 of Schedule D. But because it's taxed differently it also goes on line 19 of Schedule D. See the schedule D tax worksheet for tax calculations.