Selling a rental & depreceation recapture?

4 Replies

Does anyone know how depreceation recapture works?

I am selling a home for the first time and have no idea how this works. I purchased this property in 2008 as a primary residence and turned it into a rental a year later. I purchsed it for $180K and expect to sell it for $210k. I have taken $21k in depreation over the time it has been a rental. I know I will have to pay capital gains tax of 15%/20% on the relized gain of about $20k after about $10k in commision. Do I have to pay tax on the deprecation I have taken as well? If so what percentage?

I would really appreciat some help on this I'm clueless
Thanks

I am not a tax accountant, but to the best of my knowledge you would add the depreciation you have taken into your gains and pay capitol gains tax on that amount. So in your scenario you would pay capitol gains on $41k.

If you are buying another investment property you can roll the money over through a 1031 exchange and put off paying taxes until some point when you cash out.

I would double check with a CPA to get definate answer.

The depreciation recapture is taxed separately/in addition to, from the cap gains, currently at a 25% rate I believe.

Your gain on the sale is the net selling price (price less selling costs) less the basis. You basis is the amount you paid plus purchase costs less depreciation taken (or allowed if that's more than you took). So, if $180 is what you paid plus costs and you took $21K in depreciation your basis is now $159. If $200K is what you net from the sale your total gain is $41K. Of that you will pay the tax on unrecaptured depreciation (25%) on $21K of the gain and capital gains tax (15%) on the remaining $20K.

If you have disallowed passive losses in previous years, you can use those to offset some of the gain.

There's also a bit of trickiness around basis when you convert a primary residence to a rental. I don't recall the details.

Your accountant should be able to work through all the details for you.

A 1031 exchange is something to consider if you're thinking of buying another rental.

@jon I was afraid that was the case the property is in California so the state will also get a cut. My concerne on doing a 1031 excange is not being able to meet the 45day deadline to select a property and qualifying for a loan on the new property. I have 3 other rentals and my primary residence and would reserves on all those I only have about $20k liquid for reserves and to put into another property.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here