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Old 11-24-2015, 03:29 PM
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Depreciation Recapture if Ineligible to Take Full Depreciation due to Income

Hi All,

I'm a first time poster and live in New York City. I recently purchased a rental property and would greatly appreciate your help with a depreciation recapture issue.

I understand that because my income exceeds the phase out limit for being able to deduct depreciation against non-rental income and I do not qualify as a real estate professional, I'm only able to use depreciation to offset the income from my rental property. The way my numbers work out, this results in me only being able to "use" about 20% of the depreciation each year. For example, if the price of my condo divided by 27.5 is $10,000 (assume no land value), the maximum depreciable amount would be $10,000 per year. Assuming rental income for the year is $12,000 and expenses total $10,000, net profit would be $2,000, so I'd only be able to use $2,000 of my depreciable amount because I only have $2,000 in rental income remaining to offset. That leaves $8,000 of "unusable depreciation."

My question is when it comes to depreciation recapture time when I sell the condo, do I have to pay depreciation recapture tax on only the amount I was actually able to depreciate (i.e., the $2,000) or on the full $10,000?

I've been reading a lot online and the writers always say depreciation is not optional and you must pay depreciation recapture tax on the maximum depreciation amount whether you take the depreciation or not, but this doesn't make sense to me if I have no way of actually benefiting from taking the full depreciation due to my "high" income. How can I be taxed on the full $10,000 when I sell the property if I was legally only able to use $2,000 of it? I haven't seen the nuance I mentioned above clearly addressed.

Would you please help me understand? Thank you very much!



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Old 11-24-2015, 05:18 PM
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Originally Posted by reinvestor View Post
Hi All,

I'm a first time poster and live in New York City. I recently purchased a rental property and would greatly appreciate your help with a depreciation recapture issue.

I understand that because my income exceeds the phase out limit for being able to deduct depreciation against non-rental income and I do not qualify as a real estate professional, I'm only able to use depreciation to offset the income from my rental property. The way my numbers work out, this results in me only being able to "use" about 20% of the depreciation each year. For example, if the price of my condo divided by 27.5 is $10,000 (assume no land value), the maximum depreciable amount would be $10,000 per year. Assuming rental income for the year is $12,000 and expenses total $10,000, net profit would be $2,000, so I'd only be able to use $2,000 of my depreciable amount because I only have $2,000 in rental income remaining to offset. That leaves $8,000 of "unusable depreciation."

My question is when it comes to depreciation recapture time when I sell the condo, do I have to pay depreciation recapture tax on only the amount I was actually able to depreciate (i.e., the $2,000) or on the full $10,000?

I've been reading a lot online and the writers always say depreciation is not optional and you must pay depreciation recapture tax on the maximum depreciation amount whether you take the depreciation or not, but this doesn't make sense to me if I have no way of actually benefiting from taking the full depreciation due to my "high" income. How can I be taxed on the full $10,000 when I sell the property if I was legally only able to use $2,000 of it? I haven't seen the nuance I mentioned above clearly addressed.

Would you please help me understand? Thank you very much!

I understand that because my income exceeds the phase out limit for being able to deduct depreciation against non-rental income and I do not qualify as a real estate professional, I'm only able to use depreciation to offset the income from my rental property. The way my numbers work out, this results in me only being able to "use" about 20% of the depreciation each year. For example, if the price of my condo divided by 27.5 is $10,000 (assume no land value), the maximum depreciable amount would be $10,000 per year. Assuming rental income for the year is $12,000 and expenses total $10,000, net profit would be $2,000, so I'd only be able to use $2,000 of my depreciable amount because I only have $2,000 in rental income remaining to offset. That leaves $8,000 of "unusable depreciation."===>> You must claim r/e taxes or mortgage interest and then other expenses and you lastly may claim annual depreciation expenss to offset your rental income.

My question is when it comes to depreciation recapture time when I sell the condo, do I have to pay depreciation recapture tax on only the amount I was actually able to depreciate (i.e., the $2,000) or on the full $10,000?====>>On the full $10K; sec 1250 recapture involves taking the prior depreciation deductions back into income, and it occurs at the sale of a property.however,When the property is sold, any passive activity losses that were not deductible in previous years become deductible in full. This can help offset the tax bite of the depreciation recapture tax.Also, yoru condo as rental pty can be sold as part of a like-kind exchange to defer both capital gains and depreciation recapture taxes;sec 1250 depreciation recapture differs in that the maximum tax rate that applies is currently 25 % if your tax rate is 25% or higher. The recapture applies to the full amount of the original cost that you claimed as depreciation. For example, say the house cost you $50Kand you used $40K as your depreciable basis ,allocating $10Kto nondepreciable land, then $40K is treated as Section 1250 recapture.


depreciation is not optional and you must pay depreciation recapture tax on the maximum depreciation amount whether you take the depreciation or not, but this doesn't make sense to me if I have no way of actually benefiting from taking the full depreciation due to my "high" income. How can I be taxed on the full $10,000 when I sell the property if I was legally only able to use $2,000 of it? I haven't seen the nuance I mentioned above clearly addressed.====>I guess tax rules do not have to be precisely logical ; and that is why the tax law says so; the rules relating to determination of depreciation recapture of sec 1250 recapture income tax liability have been substantially modified over time, and are quite specific and detail oriented. Arguably one of the most confusing income tax liabilities for investors in real estate to determine is the depreciation recapture income tax liability on the sale of investment rental property. While most investors are aware that they will be liable for depreciation taken that has not been offset by corresponding capital improvements in the property, actually determining the amount subject to recapture is often confusing.



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