Depreciation Recapture Tax – What You Owe the Feds When You Sell
If you’re about to sell a rental property that you’ve owned for more than one year then prepare to pay the Feds a depreciation recapture tax. Real estate sold one year or less is classified as a short-term gain and gets taxed as ordinary income so it’s irrelevant; recapture tax only applies to an income property held for more than one year.
What is depreciation recapture tax? The tax you have to pay on accumulated depreciation taken during the years you owned your rental income property. Namely, when you sell real estate investment property with a recognized gain, the recapture tax is the Fed’s way to “recapture” back a part of the tax shelter benefit you’ve enjoyed during ownership.
For example, if you sell an income property and realize a gain of $300,000 of which $100,000 is attributable to depreciation, your accumulated depreciation of $100,000 gets taxed at 25% (the current tax rate) meaning that you owe the IRS a $25,000 recapture tax.
Planning for this tax is important so always consult a tax specialist before you sell rental income property. I can keep you from getting blindsided at tax time, and likewise prevent unrealistic expectations that result in an unpleasant disappointment later.
Author: James Kobzeff, May 27th, 2008
