Depreciation recapture - Posted by Hope (Fl)

Posted by JHyre in Ohio on April 16, 2002 at 06:49:24:

If you are in the 40% bracket and have the depreciation benefit recaptured at 25%, you really make out in both absolute and net present value terms.

John Hyre

Depreciation recapture - Posted by Hope (Fl)

Posted by Hope (Fl) on April 13, 2002 at 08:00:00:

I am working on my taxes and have a question about the sale of a rental home that we owned for 12 yrs. What form do I use for recapture of depreciation? Also, since I am taxed at the lower rate, do I only pay 15% tax on the recapture?

recapture rate = 25% (NT) - Posted by David Krulac

Posted by David Krulac on April 14, 2002 at 17:48:53:


Re: Depreciation recapture - Posted by Dave T

Posted by Dave T on April 14, 2002 at 14:19:52:

First you have to divide your sale proceeds between the land and the improvement(s). The portion of the profit that is attributed to the land is subject to capital gains at either a 10% rate (if you are in the 15% bracket), or a 20% rate (if you are in a higher tax bracket).

Your profit on the improvement(s) is taxed at the same capital gains tax rate as your land. The depreciation taken (or should have taken) is subject to recapture at 25% tax rate.

By way of illustration, let’s use the following as a general example. You purchase a SFR for $75K and place it in service as a rental. You allocate $25K of your purchase price to the land, and the $50K balance of your purchase price is allocated to the building structure. Since land can not be depreciated, your initial depreciation basis is $50K. After several years of rental use, you sell the property for a net of $120K.

Since the land value was initially one-third of the total purchase price, allocate one-third of the net sale price to the land – $40K. This leaves $80K of your net sale proceeds for the structure.

Now here is where you stand. You have a $15K profit on the sale of the land, and a gross $30K profit on the sale of the structure. During your rental holding period, you used to straight line method to take a depreciation expense of $12000. Your cost basis in the structure is reduced by the depreciation taken, resulting in an adjusted basis in the structure of $38K, and consequently your taxable profit on the sale of the structure is now $42K (80K mines 38K). Of your $42K profit, $30K is due to appreciation and $12K is due to depreciation.

Your gross profit of $45K (15K plus 30K) is taxed at either 10% or 20% capital gains rate. The $12K profit due to depreciation is subject to a recapture rate of 25%.

This is the general method for computing your tax liability for depreciable real property. The calculations are done on Form 4797 – land in Part I and structure in Part III.

Since the calculations can get cumbersome, I suggest you consult a professional tax preparer for assistance.

Re: Depreciation recapture - Posted by David H

Posted by David H on April 14, 2002 at 13:41:47:

Off the top of my head… isn’t this IRS form 4797 sale of business property?

Re: Depreciation recapture - Posted by GL(ON)

Posted by GL(ON) on April 13, 2002 at 16:43:50:

You must deduct the depreciation you took from the cost of the property.


Sold house for $200,000

Bought for 150,000

Capital gain 50,000

Now suppose over the years you took $30,000 depreciation.

Sold house for $200,000

Bought for $150,000 less $30,000 depreciation = $120,000

$200,000 - 120,000 = $80,000 capital gain.

Thanks for your help - Posted by Hope (Fl)

Posted by Hope (Fl) on April 14, 2002 at 18:43:52:

I spent some more time on this today, and just want to thanks for your help. I would like to clarify though, that capital gains tax is now at 8% for property held 5 yrs (ours is) and depreciation recapture is at 15% for people in this bracket.

Re: Thanks for your help - Posted by Dave T

Posted by Dave T on April 14, 2002 at 22:45:22:

Please recheck your source. The Taxpayer’s Relief Act of 1997 kept the depreciation recapture rate at 25%, even under the five year rule.

If you have a source that says differently, please post it here.

Re: Thanks for your help - Posted by Dave T

Posted by Dave T on April 14, 2002 at 22:36:08:

As I understand the new 5-year rule, the 8% (18% if your tax bracket is higher than 15%) capital gains tax rate only applies to property purchased on or after January 1, 2001 and then held at least five years prior to sale. This means that you will not be able to take advantage of the 8% capital gain rate before January 1, 2006.

8% capital gain rate - Posted by Hope (Fl)

Posted by Hope (Fl) on April 15, 2002 at 11:58:25:

The new 8% rate is effective as of January 2001 for people in the 15% tax bracket. Taxpayers who are in the higher bracket will have to wait 5 years before their tax is lowered from 20 to 18%. I found this info in the IRS Tax pamphlet 1040 on Page D-1 under general instructions.(Changes to note) I have also seen this on many of the other tax sites, such as Tax Planet. The depreciation recapture info I will also post when I find it. I am pretty sure I have read it on at least 3 different tax sites, and when you think about it, it does make sense. The benefit of the depreciation for me has been at 15%, it would be a penalty if I had to turn around and now pay 25% on this. The IRS does not penalize you into paying a higher tax than you would have otherwise paid. At least this is my understanding.