Question: How Does Recapture Of Depreciation Work?

What Is Depreciation Recapture?

Depreciation recapture is the gain realized by the sale of depreciable capital property that must be reported as ordinary income for tax purposes.

Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis.

How do you calculate depreciation recapture?

  • Record the original purchase price of the asset.
  • Compute the depreciation expense that you took or that was allowed.
  • Subtract the taken or allowable depreciation expense from your original cost basis.
  • Record the amount of your sales proceeds.
  • Subtract your adjusted cost basis from your sales proceeds.

How does depreciation recapture work on rental property?

Rental Property Depreciation Recapture. Rental property depreciation recapture is the gain that the real estate investor receives from selling the investment property, and it must be reported as income to the IRS. An adjusted cost basis just means the net cost of the asset after it’s been adjusted for depreciation.

How can depreciation recapture be avoided?

There are only two ways to avoid depreciation recapture taxes. Both of them are bad for you, but one of them might please your heirs. If you sell at or below the depreciated value, then there is no depreciation to recapture. If the house becomes part of your estate after death, the cost basis in the house is reset.

What happens when you sell a depreciated rental property?

Most people know that when they sell a home that they own as an investment they must pay capital gains taxes on any profit that they earn over the original purchase price. They also must pay a 25 percent federal recapture tax on any depreciation that they claimed if the property sells for above the depreciated value.

How do you recapture depreciation?

Depreciation recapture is the gain received from the sale of depreciable capital property that must be reported as income. Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis. The difference between these figures is thus “recaptured” by reporting it as income.

What is the depreciation recapture tax rate for 2018?

Depreciation Recapture Tax Rate

The big “gotcha” about depreciation recapture that most real estate investors don’t realize is that it’s taxed at ordinary income tax rates, maxed out at 25% plus the 3.8% net investment income tax, if applicable, not at capital gains rates.

What is the tax rate on depreciation recapture?


What happens when you sell a rental property?

When you sell your rental property, you will incur federal and state capital gains taxes. Capital gain is the difference between your selling price and your adjusted tax basis. Gain on the sale of property held for one year or less is considered short term and is taxed at your ordinary income tax rate.

How long can you depreciate a rental property?

27.5 years

What happens when rental property is fully depreciated?

It depends but in this instance, the residential rental property will be considered fully depreciated after 27.5 year. According to the IRS, You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property.

Does 1031 avoid depreciation recapture?

Depreciation is a great deduction while we own rental real estate. We do, however, need to pay it back when we sell the property. (If we don’t do a 1031 exchange.) The Federal Government charges a 25% tax on depreciation recapture upon a property’s sale.

Is there depreciation recapture on 1250 property?

Section 1250 relates only to real property, such as buildings and land. Personal property, such as machinery and equipment, is subject to depreciation recapture as ordinary income under section 1245. In essence, capital losses on all depreciable assets offset unrecaptured section 1250 gains on real estate.