Depreciation - paying back after sale of a rental?

[Tricia O'Brien]

I am trying to understand how much depreciation I will have to pay back to the IRS if I sell my single family rental home that has been a rental for 5 years. Is it the full cash amount I depreciated or the amount of depreciation multiplied by my effective federal tax rate? Hoping someone can help!  For example, I'll use these approximate  numbers to explain:

Cost basis of building: $135K

Depreciation;   $6K per year

Period of Use as a rental:  5 years

Total Depreciation: $30K

If I sell it now at a profit and my effective federal tax rate in the year of sale is 20%, what do I owe the IRS for depreciation?  $30K OR  $30K  x 0.20 = $6K  ?

Any replies would be appreciated!

[Jon Holdman]

As you take depreciation, your basis is reduced by the amount of the depreciation.  So, for your example, your basis will be $105K.  If you sell for, say, $200K and have $20K in selling costs, your gain on the sale will be $200K - $20K (costs) - $105K (basis) = $75K.  Of that, $30K will be subject to the tax on unrecaptured depreciation and the remaining $45K will be subject to capital gains tax. The tax rate for the unrecaptured depreciation is your ordinary tax rate, but currently capped at (I believe) 25%.  So assuming you're in the 28% or higher marginal tax bracket, you would have 25% tax on the $30K  ($7.5K) and 15% on the $45K ($6.75K) for a total tax bill of $14.25K.

Of course in reality the calculation will be more complex, and your accountant should work through the details.

But, no you don't "pay back" the entire amount of depreciation.  Depreciation reduces the amount of taxable income as you take it, and then you pay the taxes on that amount when you sell.

Your "effective federal tax rate" is not relevant on any additional income above whatever amount you're calculating that effective tax rate on.  What matters for the additional income is your marginal rate.