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!