Depreciation will play a role in the amount of taxes you’ll owe when you sell. Because depreciation expenses lower your cost basis in the property, they ultimately determine your gain or loss when you sell. If you hold the property for at least a year and sell it for a profit, you’ll pay long-term capital gains taxes.
Can you take depreciation on a condo?
You can depreciate the cost of the condo building itself over 27.5 years, equal to 3.64 percent of the cost of the unit per year. Be sure to take depreciation each tax year. If you sell the condo, the IRS puts depreciation back into the cost basis of the property whether you exercised this tax break or not.
What is depreciation recapture on sale of rental property?
Depreciation recapture is the gain realized by the sale of depreciable capital property that must be reported as ordinary income for tax purposes. Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis.
Do you have to do recapture on depreciation?
No depreciation recapture calculations would be required. The 25% depreciation recapture tax rate only applies to the portion of the gain attributable to real property.
Can a rental property be sold to defer recapture?
Passive activity losses that were not deductible in previous years have become fully deductible when a rental property is sold. This can help offset the tax bite of the depreciation recapture tax. A rental property also can be sold as part of a like-kind exchange to defer both capital gains and depreciation recapture taxes.
Do you have to pay recapture taxes when you sell a house?
You can NOT avoid depreciation recapture taxes by making the property your principal residence. You will still owe the taxes when you sell the property. Depreciation is recaptured at the time of sale, whether you took the depreciation or not.
What is the recapture rate on capital gains?
However, not all gains benefit from the long-term capital gain tax rates. Depreciation recapture is the portion of the gain attributable to the depreciation deductions previously allowed during the period the taxpayer owned the property. The depreciation recapture rate on this portion of the gain is 25%.
