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depreciation recapture

February 5, 2025 • General

If you’re a rental property owner, you’ve likely enjoyed the tax benefits of depreciation over the years. Depreciation recapture is the process by which the IRS collects taxes on those depreciation deductions when you eventually sell your property. In other words, while depreciation helps lower your taxable income during ownership, it also creates a future tax obligation upon sale.


How It Works

As you depreciate your property, its tax basis—essentially, its value for tax purposes—decreases. When you sell, you calculate your gain by subtracting this adjusted basis from the sale price. The portion of your gain that’s attributable to the depreciation you’ve taken is subject to recapture, meaning it gets taxed at a rate of up to 25%.


What This Means for Investors

Depreciation is a powerful tool for reducing your annual tax burden, but it comes with a catch. When the property is sold, the tax savings you enjoyed get partially “recaptured” by the IRS, which can increase your tax liability. This factor is crucial for investors to understand as it influences overall returns. Planning ahead for depreciation recapture can help you avoid unexpected tax surprises and better manage your long-term investment strategy.


Considerations and Strategies

Many investors look to strategies like the 1031 exchange to defer depreciation recapture taxes. A 1031 exchange allows you to reinvest the proceeds from your sale into another property, effectively postponing the tax hit. It’s important to work with a tax professional or financial advisor to understand how recapture fits into your broader investment goals and to ensure your tax planning is sound.


Bottom Line

Depreciation recapture transforms the short-term tax benefits of owning a rental property into a long-term tax consideration. By understanding how recapture works and planning for its impact, you can make more informed decisions about buying, holding, and eventually selling your investment properties. This insight is key to maximizing your returns and maintaining a healthy investment portfolio.

 

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as financial, legal, or real estate advice. Every real estate transaction is unique, and readers are encouraged to seek professional advice tailored to their individual circumstances. We strive to keep the information accurate and up-to-date, but we make no warranties or guarantees regarding the completeness, accuracy, or reliability of the content. For specific guidance, please consult a licensed real estate professional or legal advisor.
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