Watch out for depreciation recapture when you sell your rental property!

Depreciation is one of the greatest benefits of owning rental properties. It offers some of the biggest tax deductions you may be entitled to, without you having to spend the money.

That being said, you need to pay attention to a process called “depreciation recapture” when you decide to sell your property. This process simply means you will have to pay back your depreciation when you sell the property and that depreciation recapture payment is taxed at your ordinary income rates.

 For instance, let’s say you purchased your rental property for $100,000, renovated for $40,000 and accumulated depreciation for $20,000. Assuming you sold the property for $200,000, your total gain would be $80,000 (200,000 – (100,000+40,000-20,000)). Of that gain, $20,000 of accumulated depreciation would be recaptured and taxed at your ordinary income rates, capped at 25% . The remaining $60,000 would be taxed at your capital gain rates.

The longer you own your property, the bigger the tax on depreciation recapture. There are some strategies to legally avoid depreciation recapture. Plan ahead with your tax practitioner if you intend to sell a rental property this year. DO NOT wait until the last minute and book an appointment with us at www.lobecpa.com!