Depreciation Recapture on a sale with a Capital Loss

Member since 2020 · 2 posts · 2 votes

Recently sold a property at a loss and wondering if depreciation recapture should be taking place? For rough numbers we purchased property for $1.65M and sold for $1.35M. Owned for 4 years and had about $225,000 in depreciation during that time. To me that’s a $330,000 loss but accountant telling me it’s $135,000 because depreciation gets added back in. The reason we’d like loss higher is because we sold another property for a large gain and would like to hedge as much loss against it to cut gains tax on that sale. Thanks in advance to all and much appreciate any and all help!

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Lauren Robins

Attorney · Salt Lake City, UT · Member since 2025 · 144 posts · 180 votes

Hi Justin!

When you sell a property at a loss, the tax treatment can be counterintuitive due to how depreciation is handled. Even though you sold the property for $300,000 less than you paid for it ($1.65M purchase vs. $1.35M sale), for tax purposes, your loss is calculated against the adjusted basis, not the original purchase price. The adjusted basis is the original cost minus any depreciation taken—so in your case, $1.65M minus $225,000 equals an adjusted basis of $1.425M. Comparing that to the $1.35M sale price results in a taxable loss of only $75,000. Your accountant appears to be referencing a loss of $135,000, possibly adjusting for selling costs or other basis adjustments, but the key point is that depreciation reduces your basis and therefore reduces the size of your capital loss. Importantly, depreciation recapture only comes into play if you sold the property for more than your depreciated basis—i.e., at a gain. Since you sold below your adjusted basis, there is no depreciation recapture to pay. While this smaller loss is less helpful in offsetting gains from the other property sale, unfortunately, it aligns with tax rules under IRC §1011 and §1250.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

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Lauren Robins
Attorney · Salt Lake City, UT · Member since 2025 · 144 posts · 180 votes
1y
Hi Justin!

When you sell a property at a loss, the tax treatment can be counterintuitive due to how depreciation is handled. Even though you sold the property for $300,000 less than you paid for it ($1.65M purchase vs. $1.35M sale), for tax purposes, your loss is calculated against the adjusted basis, not the original purchase price. The adjusted basis is the original cost minus any depreciation taken—so in your case, $1.65M minus $225,000 equals an adjusted basis of $1.425M. Comparing that to the $1.35M sale price results in a taxable loss of only $75,000. Your accountant appears to be referencing a loss of $135,000, possibly adjusting for selling costs or other basis adjustments, but the key point is that depreciation reduces your basis and therefore reduces the size of your capital loss. Importantly, depreciation recapture only comes into play if you sold the property for more than your depreciated basis—i.e., at a gain. Since you sold below your adjusted basis, there is no depreciation recapture to pay. While this smaller loss is less helpful in offsetting gains from the other property sale, unfortunately, it aligns with tax rules under IRC §1011 and §1250.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
1y
I'd agree with your accountant. The $225,000 depreciation was effectively a loss you got to take in the years before the sale.
To reduce your taxes this year, buy another property and take bonus depreciation.
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Justin Bush
OP
Member since 2020 · 2 posts · 2 votes
1y
To both of you…thank you so much for the responses! Lauren, that’s the best explanation I could have asked for and makes it all very clear! Greg, hello from SW Michigan! Thanks again guys!
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Mohamed YoussefBusiness Member
Accountant · Brea, CA · Member since 2018 · 123 posts · 67 votes
1y
Correct. The IRS prohibits "double dipping" in the context of taxes.

"Double dipping" refers to the practice of receiving a tax benefit for an expense or item that has already received a tax benefit or was paid for with pre-tax dollars. Essentially, you cannot get two tax advantages for the same expense.
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Sean O'KeefePro Member
CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes
1y
Quote from @Justin Bush:

Recently sold a property at a loss and wondering if depreciation recapture should be taking place? For rough numbers we purchased property for $1.65M and sold for $1.35M. Owned for 4 years and had about $225,000 in depreciation during that time. To me that’s a $330,000 loss but accountant telling me it’s $135,000 because depreciation gets added back in. The reason we’d like loss higher is because we sold another property for a large gain and would like to hedge as much loss against it to cut gains tax on that sale. Thanks in advance to all and much appreciate any and all help!
Some good answers to your question above.

I think you are asking the wrong question. I think the question that you should be asking instead of how to calculate a capital loss and depreciation recapture is -> What tax strategies are available to me to reduce capital gains taxes on the sale of the 1st investment property ...? I would explore this with your current CPA. If you don't trust that they can support you with this then find another CPA that's an expert in real estate and planning.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
1y
@Justin Bush If you sell a rental property below its adjusted basis (purchase price minus depreciation), depreciation recapture does not apply. In your case, with $1.65M purchase, $225K depreciation, and $1.35M sale, your adjusted basis is $1.425M, so your tax loss is $75K, not $300K. The IRS already gave you $225K in depreciation deductions, which permanently lower your basis. You can use the $75K capital loss to offset gains from another sale, but there’s no depreciation recapture since you sold at a loss relative to your adjusted basis.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.
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