Depreciation recapture is the portion of the gain that is taxed as ordinary income when an asset is sold for more than its depreciated value. This tax applies to the sale of rental or investment property that was previously depreciated for tax purposes.
Key-Takeaway
- Depreciation recapture applies to the sale of rental or investment property that was previously depreciated for tax purposes.
- Depreciation recapture is the portion of the gain that is taxed as ordinary income when an asset is sold for more than its depreciated value.
- The amount subject to depreciation recapture is equal to the sum of all previous depreciation deductions claimed for the property.
Example
Suppose a taxpayer purchased a rental property for $200,000 and claimed $50,000 in depreciation deductions over the years. If the property is sold for $300,000, the taxpayer will have a capital gain of $100,000. However, the first $50,000 of that gain will be subject to depreciation recapture and taxed as ordinary income.
Tips
- Consider the impact of depreciation recapture on your tax bill before selling a rental or investment property.
- Seek advice from a tax professional to determine the potential tax liability for depreciation recapture and plan accordingly.
Recommendations
- Consider using a 1031 exchange to defer the tax on the gain from the sale of the property, including the portion subject to depreciation recapture.
- Consider the use of a Delaware Statutory Trust (DST) or Qualified Opportunity Fund (QOF) to defer the tax on the gain from the sale of the property, including the portion subject to depreciation recapture.
- Consider restructuring the sale of the property to minimize the amount subject to depreciation recapture.
