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H. James Lee
  • Brooklyn, NY
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Depreciation Recapture - Qualified Opportunity Zone question.

H. James Lee
  • Brooklyn, NY
Posted Nov 21 2018, 13:35

I'm unclear about the depreciation recapture if I were to sell a property and invest the capital gains into a QOZF.

Example: Let's assume I bought a SFR for $375k 10 years ago, of which $275k is depreciable. So in 10 years, I would have $100k in accumulated depreciation ($275k/27.5 * 10). Let's say I sell this year and nets $750k after fees and expenses and I never had to do any capital improvements. Capital gains: $475k and Adjusted basis: $275k

Investing in a QOZF would help me defer taxes on the $475k capital gain until December 31, 2026, but what about the $100k in depreciation?  Does it get deferred the same way as the gains or treated as ordinary income on the sale year?  

If you have owned a property for many years, have a low adjusted basis, and high accumulated depreciation, would you be better off going with a 1031 exchange when selling the property and reinvesting the proceeds?

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