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Old 05-20-2012, 08:29 AM
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Questions about Depreciation Recapture

Hello. We are about to sell our primary residence that we had to rent for 4 years when we were stationed overseas. We depreciated it for those four years, but then came back and lived in it for another four before selling it. What we're trying to figure out is how much we have to payback to the government in depreciation recapture - is it the full amount of 18500 or is there some kind of break? Also, do we pay the recapture back when we sell or when we file our 2012 taxes?

Thanks for your help.



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Old 05-20-2012, 10:25 AM
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“We depreciated it for those four years, but then came back and lived in it for another four before selling it. “---->Correct; when you sell your investment property, you are subject to a 25 percent tax on all depreciation you have claimed. Even whether you convert your rental property to your primary residence , you still need to recapture deprecation on the sale of the home.
“What we're trying to figure out is how much we have to payback to the government in depreciation recapture - is it the full amount of 18500 or is there some kind of break? “---->No break but it depends; as long as the total cumulative depreciation amount is $18,500, then, you must recapture the whole of the full amount, $18,500;however, if you carry forward NOL or you have LTCL on the sale of the home , then, you may not have to fully recapture your deprecation. What I mean is that for example, assume that on the sale of your rental property, your LTCL is $20k, then, your LTCL, 20K>$18,500, your cumulative depre, you do not need to pay tax on your recaptured deprecation. On the contrary, assume that you have no NOL carryforwad or your LTCG is $20K, then since your LTCG, 20K> $18,500, yur recaptured depre, then you must pay tax on the whole $18,500, your tax liability is 6,875;$18,500*25% and the remaining LTCG , $1,500;$20K-$18,500’d be subject to lower LTCG rate as Sec 1231 property. However, you can defer depre recap under 1031 exchange rule. Section 1031 of the Internal Revenue Code allows a real estate investor to sell a rental property without having to pay tax on either the profit, called capital gains, or the depreciation when you sell the property through what is known as a deferred exchange or 1031 exchange. OR as said previously, when your rental property is sold, any passive activity losses, NOL, I mean, that were not deductible in previous years become deductible in full. This can help offset the tax bite of the depreciation recapture tax.
“Also, do we pay the recapture back when we sell or when we file our 2012 taxes?”---->Correct; depreciation recapture is a tax provision that allows the IRS to collect taxes when you dispose of an asset that you had previously used to offset taxable income. As you own rental property, you can use the depreciation of the property to offset your taxable income by lowering taxable income/tax liability. In doing so, you lower your basis in the property so that when the property is sold, your capital gain is computed based on the selling price minus your purchase price and all depreciation that you previously claimed. It's very important to calculate your depreciation recapture liability, because depreciation recapture is taxed as ordinary income, 25% tax rate, (your depre recap is NOT Sec 1250 provision, but real estate depre recap)as opposed to capital gains. So, if you sell it in 2012, then you need to recapture your depreciation in 2012(paying tax on it on your 2012 return, I mean.



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Old 05-20-2012, 06:31 PM
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Thank you so much for this information. It was really helpful and made a confusing situation make sense. Have a great day.



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