Depreciation Carryover and Recapture questions

5 Replies

1) Depreciation Carryover - Let's hypothetically say I have $100K in salary so that I qualify for $25K in passive activity loss deductions. In 2012, I take a $30K net loss from real estate operations. My understanding is I can deduct $25K from my AGI, which brings my taxable income down to $75K in 2012. However, I have to carry over $5K in losses because it exceeds my $25K annual limit. In 2013, I break even on real estate activity. I am at this point allowed to use my carried over $5K as a deduction to my AGI. Right? More broadly, am I allowed to apply this carry over deduction in any subsequent year in which I am eligible?

2) Depreciation Carryover - Let's say I make $200K in salary and am not eligible for the $25K annual passive activity loss deduction. Across the life of my real estate investment, I accrue $50K in depreciation/passive activity loss carryover. I sell the property and break even - $0 profit. What happens to the $50K that has been carried over?

3) Depreciation recapture - Same example as #2, but I actually make a $100K capital gain on sale. What happens to the $50K that has been carried over?

4) Same as #4, but I use a 1031 exchange.

Thanks for any help you can provide on this subject!

Well, posted too soon. Did some more research and I learned that:

  • Carryover losses extend indefinitely until final sale (and can be transferred from property to property if a 1031 is used). They can be applied in any year you are eligible and carried over in years you are not.
  • At final sale, the carryover losses are subtracted from the gain on sale. So if you gain $50K and you have $20K in carried over losses, your taxable amount is only $30K.
  • However, you would still need to pay taxes on depreciation recapture at this point. So if your gain was $50K, your carryover loss was $20K, and your total depreciation taken was $300K, I understand you'd have to pay capital gains tax on $30K (50-30), plus 25% tax on the $300K depreciation recapture.

Oh my gosh I actually understand this. I've been reading and getting "counsel" on the depreciation and loss carry over and the recapture to get an understanding of what has long so eluded me. Thanks!

Originally posted by @Vik C. :

1) Depreciation Carryover - Let's hypothetically say I have $100K in salary so that I qualify for $25K in passive activity loss deductions. In 2012, I take a $30K net loss from real estate operations. My understanding is I can deduct $25K from my AGI, which brings my taxable income down to $75K in 2012. However, I have to carry over $5K in losses because it exceeds my $25K annual limit. In 2013, I break even on real estate activity. I am at this point allowed to use my carried over $5K as a deduction to my AGI. Right? More broadly, am I allowed to apply this carry over deduction in any subsequent year in which I am eligible?

2) Depreciation Carryover - Let's say I make $200K in salary and am not eligible for the $25K annual passive activity loss deduction. Across the life of my real estate investment, I accrue $50K in depreciation/passive activity loss carryover. I sell the property and break even - $0 profit. What happens to the $50K that has been carried over?

3) Depreciation recapture - Same example as #2, but I actually make a $100K capital gain on sale. What happens to the $50K that has been carried over?

4) Same as #4, but I use a 1031 exchange.

Thanks for any help you can provide on this subject!

 In your first scenario it will be used as your losses slow up to the max allowance of 25k.

2. It will be released at the time of sale to offset other income at ordinary rates. 

3. Same situation as 2.

4. It is all deferred and carried over to the new property. 

One part you missed is your passive losses become deductible against ordinary income. Depreciation recapture is capped at 25% 

You would have in your example a gain of 50 at 15-20% capital gains rates. And a loss deductible against ordinary income. And recapture taxed up to 25%. So if you are in the top tax bracket you see massive savings. This is why we love cost segregation.