Deprecation recapture - How does that work?

[mjmusante]

How does deprecation recapture work?

[DavidD66]

When you sell an asset that has been depreciated (expensed over time) for a gain, the amount of the gain attributable to depreciation is taxed as ordinary income, as opposed to a capital gain.  For example, lets say you have a rental house with a cost basis of $100,000.  While it is rented, you take $20,000 of depreciation expense.  You then sell the house for $150,000.  Your gain on the sale is $70,000 ($150,000 - ($100,000 - $20,000)).  Of the $70,000 gain, for tax purposes you will have a long term capital gain of $50,000 and $20,000 of depreciation recapture, taxed as ordinary income (which for real estate is capped at 25%).   Had you sold the house for $90,000, you would have $10,000 of depreciation recapture and no long term capital gain.