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Depreciation Recapture Explained [Tax Smart Daily 007]

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You have to pay a tax on the depreciation you've previously claimed when you sell a rental property. There are three types of depreciation recapture: (1) Sec. 1245 recapture; (2) Sec. 1250 recapture; and (3) unrecaptured Sec. 1250 gain.
Learn how this tax may impact you when you sell your rental in today's video.
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Опубликовано:

16 авг 2024

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Комментарии : 76

@marvinedwards7011 2 года назад

Sounds like I will pay a huge tax when I sell my rental home. Good information.

@user-nd7bb3kh3c Год назад

hey Brendan, I am a graduate school student and I must say you were so clear and to the point in explaining what Depreciation Recapture Tax is. Thank you. Looking forward to watching more of your informative videos!

@kevinhanford8415 2 года назад

Excellent summary of recapture, just what I was looking for. As a real estate investor it amazes me how few people in the professional real estate business understand recapture even a little. I here many talk about depreciation like it is tax free write off. I even had a discussion with a cost seg sales guy who could not explain recapture. Thanks for the video!

@TheRealEstateCPA 2 года назад

Thank you for your kind words!

@SnakeHandler-g7u Год назад

So I’ve heard option 2 described as a “lazy 1031.” I have a house I’m considering selling outright to move into a syndication deal (no 1031 because the value is too small). However I’ve 1031’d into the house and done a bonus depreciation on it this year!

@DanielJohnson-bg3rf 2 года назад

Thanks! I wasn’t aware that the bonus depreciation recapture will be taxed at a higher rate than the typical depreciation.

@Mrez95 2 года назад

Just found this channel and I got immense value, thank you so much! I have a question: Assuming all passive losses have been suspended for the duration of the property, upon sale - would the "suspended passive losses" negate the "depreciation recapture"? I need some help understanding the effect of this and any intricacies in tax liabilities, because right now they feel like opposite terms of the same meaning.

@sueforwith Год назад

Been looking for a simplified explanation after my bonus cost seg. Thanks

@marinawong9662 2 года назад

Thank you for doing this video. I was just discussing recapture with an investor friend last week. I will share this with him. I wonder if you can do another as a follow up to this video examples of tax calculations? Often when people are ready to sell, they would wonder if it is worth it to do a 1031 (while it’s not expensive, it’s not free and takes quite a bit of energy and time). Capital gain seems to have multiple brackets as well. So if you can have a video that explains the tax consequence of the capital gain and recapture using some sales examples, that would be great. Thank you

@steveworrell5377 2 года назад

Great explanation, especially without the benefit of a dry erase board graphic. Well done!

@gusemery5475 2 года назад

What’s the point of claiming depreciation if you have to pay it back?

@alexcelbun 3 года назад

Thanks for sharing. Great info

@andriyboychuk9677 2 года назад

I love the way you explained it. It is very clear about the depreciation recapture for bonus depreciation!!!! Thanks

@edithfeild785 2 года назад

Hi Brandon, Thanks for the video. Can you explain where section 1245 and 1250 depreciation recapture are shown on a member's K-1 for the sale of a property owned by an LLC?

@tonyringer8952 3 года назад

Awesome info thanks!

@metalrooves3651 6 месяцев назад

YOU HAVE TO DEPRECIATE IT!!!this is important...I DID NOT!!!!already had it 5 years!,,,now what?Its aSHORT TERM

@tanyaharris6667 2 года назад

Thank you. Very clear on 1250 recapture.

@TheRealEstateCPA 2 года назад

Glad it helped!

@kellengaskill2085 10 месяцев назад

How would the depreciation recapture work for a car rental business?

@shinessmiles6586 Месяц назад

Hi, I just wanted to clarify you said that depreciation is like a loan from the IRS. How does that work am I allowed to use that ”loan” for business purposes.

@Jensen-Adventures 3 года назад

Great video. Thanks for all you do!

@TheRealEstateCPA 3 года назад

My pleasure!

@jamesc4362 10 месяцев назад

Great video, I own a property for 15 yrs in California and it's a second home and never claim as a rental and never do a depreciation claim. How would I pay the depreciation recapture tax and how would it calculate if I didn't depreciate all these years? I am looking for an answer to this. thanks.

@noname-rv7yh 10 месяцев назад

how do i find someone to do a cost segregation. I live in northeast PA and it seems like it's exotic trying to find someone to do this. Is there a certain type of profession that does this? Like an inspector or appraiser or engineer? I don't see the service advertised anywhere locally for me.

@andriyboychuk9677 2 года назад

I wonder then - what if in cost seg, everything goes towards 15 year property. Does that get around this by making it 1250? Or once it is special / bonus depreciation, it is ordinary gains?

@davidjewett5758 7 месяцев назад

Yet another reason to abolish the IRS. ;)

@user-hm8yu1fy3v 7 месяцев назад

Thanks for the explanation. Consider the following scenario: one generates 10k in cash flow and is able to not pay tax on it after claiming a 20k in depreciation during the holding period. If I hear it correctly, you would get taxed on the 20k total depreciation at sale, not the 10k taxable cash flow the depreciation offsets?

@QueOndaWhey 2 месяца назад

Add them together: the cash profit / gain + the depreciation previously deducted.

@doreenmaloney 2 года назад

I have quick question on depreciation recapture. Scenario: Owner occupied duplex for 20 years. Depreciation claimed on the rental (1/3 of building). In year 21, owner moves out and rents both units. If selling the property 5 years later (after the allowable primary residence exemption on the lower unit), would the depreciation recapture be calculated on what was taken on the 20 years of returns, or will it be a blanket 25% of the sale price - the cost of purchase. I hope that makes some sense.

@incantations446 5 месяцев назад

What can you do if your depreciation amount was in excess of the taxes you took out? Can you reclaim the rest in the taxes next year? For example: I had 60k bonus depreciation but my accountant only got me $27k return because my actual income was not high enough.

@GregOreo1022 2 месяца назад

Can you depreciate condos the same way?

@laurenstewart5457 2 года назад

I have a question about doing the 1031 - if the value of the new property is significantly higher than the initial value of the one you sold, are you able to capture that in an additional cost segregation study on the new property?

@nathancalacat3019 9 месяцев назад

Great content. Do you know of any recommended companies to perform these cost segregation studies for a small residential property like a duplex in California?

@marttyd Год назад

I’m going to try a question. Ex. bought a property in for 130,000 and have been depreciated $4700 a year for 15 years. No significant improvements and have just paid taxes and cost of renting it out. Paid taxes on rental income. If I would sell it after 15 years for $400,000 how much would I owe for recapture assuming 15% tax bracket? What about capital gains? I’m confused a little.

@TheRealEstateCPA Год назад

assuming you took $4700 for 15 years you'd have accumulated depreciation of $70,500. Thus your cost basis is $59,500 and total gain of $340,500. Depreciation recapture is generally taxed as ordinary income up to a maximum rate of 25% so multiply your ordinary tax rate by $70,500. There is no 15% ordinary bracket, but say your in the 22% ordinary bracket, the tax would be $15,510 The remaining 270,000 capital gain would be taxed at the 15% cap gain bracket and result in $40,500 in tax

@marttyd Год назад

Wow! I was hoping for an answer but never expected one! Especially an answer so soon and understandable! Thank you! I subscribed to your channel. Thanks again!

@execjoe5972 Год назад

What valuation or who conducts the evaluation for unrecaptured 1250 gain? Thanks

@Rayraymai 5 месяцев назад

So if you sell the property after 27.5 years. There will be no depreciation recapture?

@ShawnMcKibben Год назад

Sold a rental condo that only had for 9 months (bought 5/21, sold 2/22). Did straight line depreciation for 2021. So even though I didn't use accelerated depreciation, I still have to add that depreciation to sale price (recapture), which will increase my tax liability on the sale? Thanks very much for your help.

@rachellachamawi6343 2 года назад

How much depreciation for a commercial property that was built in 1990. The cost without land is: $650,477 ? Thank you

@eobien 2 года назад

How do depreciation and recapture of a gifted property turned a rental work?

@marionharris5952 Год назад

Great videos.

@officeinaboxaccounting7794 Год назад

What happens if I retire my rental and move in?

@flamingjune27 11 месяцев назад

Question when considering depreciation recapture. If the real estate was run down and the value was pretty close to what it was depreciated to, then it cost about as much in repairs to get it to a sellable state, does the cost of repair adjust the basis back up? Or is it just reducing the capital gain calculated?

@shimmerfinancial 2 года назад

This was awesome! I am an interior designer turned, REI turned note investor. This was so helpful in getting my brain wrapped around the topic of recapture. I have one big question, why didn't you mention an installment sale? Either through straight owner financing or an installment sales trust? Those are two viable additional options, yes? or am I off my rocker? :)

@kameisama 2 года назад

I heard installment sale triggers depreciation recapture and is not eligible for 1031 exchange treatment since it is not a complete exchange within the 1031 window

@jamescrenshaw5097 Год назад

I was going to mention installment sale too, but just to cite that depreciation recapture cannot be deferred to later years via an installment sale, only capital gain

@chasewilson2451 6 месяцев назад

Do you have training courses as well. I will be a new real estate investor this year. I want to specifically understand utilizing a MFH for the STR loophole. I know that it can be tricky and require very thorough planning. Thanks for your time.

@TheRealEstateCPA 6 месяцев назад

Yes we do. We have an entire course on the STR Loophole. It's part of our Tax Smart Insiders community. You can learn more and join today by visiting www.taxsmartinvestors.com/become-an-insider

@TheK9Shepherd 10 месяцев назад

What about recapturing of depreciation if you just rented a room (not a rental property)? Mother rented a room and the accountant depreciated the sqft of the rooms that were rented (so it wasn't a "rental property") It was her primary home (still is) The house is in a revocable trust, going to my wife (sole beneficiary) So when we go to sell the house once it's passed down in the trust to my wife. Will she had to pay the recapture of depreciation? Don't even have a clue what those numbers are. I just know they depreciated the sqft of the room when I came across some old returns. Thanks

@mlbanson 2 года назад

Thanks, Brandon. Great video. If you pass away and the property gets a step up in basis, is there is still a depreciation recapture? Also do you get to depreciated the property at the new stepped up basis value. thanks

@midnightdragonfly9707 Год назад

This is a great question. I hope he answers!

@KEVINSURIEL 6 месяцев назад

I had a question not sure if you guys know the answer to this Basically let say you have a trucking business 1. Buy a truck for 150k Are you allowed to depreciate the truck if you want for 3,4 or 5 years ? 2. Let's say you depreciate over 4 years because when you plan to sell it that is 37,500 depreciation yearly 3. Now on year 5 since you are done with it you plan to sell it and now its worth 30k for example the truck that is Is the 30k captured as a pure profit? Obviously you are going buy a NEW TRUCK as a business owner But for the sake of argument is 30k a profit? Does depreciation capture the full cost of the truck over the lifetime of the TRUCK

@Frank-nh9fe 2 года назад

If one had unusually low earned income it appears that one could be in the zero tax bracket for cap gains and thus avoid all or most cap gains tax as well as dep recapture tax as well?

@rhaydsouza0912 2 года назад

Question: I have a personal car I have been using for 3 year. Next year my wife plans to user this car for her business 100% of the times. How would I calculate depreciation? Do I need to sell the car to her first or can she take the estimated cost of the car from KBB and calculate depreciation via actual expense method.?

@michaelshehata1415 2 года назад

Thank you so much for this wonderful material….Is it true that 1245 property held for more than 3 years becomes 1231 and gets taxed as capital gain on recapture?

@9doggie12 2 года назад

What if I don’t want to depreciate cause I have no intentions of taking a loan from the government

@gusemery5475 2 года назад

It’s certainly what it sounds like.. They give with one hand and take with another 🤔

@stevedowns8905 2 года назад

If you have passive losses from the activity that generated the depreciation recapture or other passive activities losses, can this offset or reduce the depreciation recapture?

@TheRealEstateCPA 2 года назад

Yes!

@sagarvijapura9178 2 года назад

Is this also true for BONUS depreciation recapture?

@ThaoPhuong-ln9vc 2 года назад

Does land improvement (15 years) fall under unrecaptured Sec. 1250 gain? Thanks.

@tphilip9874 Год назад

Thanks for the content. Quick question - If AGI is over 150K, then the depreciation is non-deductible on passive real-estate investments - I understand the unutilized losses can be used against future profits from rent and even against some K-1 income. However, can unutilized losses be used to offset capital gains when selling the property (assuming no 1031)?

@TheRealEstateCPA Год назад

Generally yes

@Rayraymai 5 месяцев назад

If you put the property in the trust and you pass away, now your son owns your property. Does that free my son from depreciation recapture? Or can he accelerated depreciation again?

@Zhenkaaa 4 месяца назад

You carry it to the grave

@franklynj4298 3 года назад

Great video Brandon. Do you happen to have (or know of) a calculator I could use to determine specific depreciation recapture on the sale of a property? I know you explained it in your video, but a tool like that would be handy. Thx.

@TheRealEstateCPA 3 года назад

I don't know of one off hand but your tax advisor should be able to project it for you (since the depreciation has been logged in their software)

@maqnthreez 2 года назад

If “recapture” applies to the basis of purchase; what happens, when sold less than original purchase?

@Mark-ll2bj 11 месяцев назад

It should be your capital loss. Eg. My car cost was 10k. Depreciation amt is 8k. My adjusted base is now 2k which is an ordinary income now. 7:57 If I sell the car at 14k , my capital gain applicable for concessional tax will be 2k ( 4K margin minus 2k adjusted base) hope it makes sense.

@simplylicia 3 года назад

Hi Brandon, I love your page and content! I had a question about the 1031 exchange strategy. I assumed the 1031 exchange was only for the capital gain earned when sold, how would depreciation create a gain that can be rolled forward? Does depreciation normally create a loss?

@TheRealEstateCPA 3 года назад

Gain from depreciation (depreciation recapture) can be rolled forward in a 1031. Thanks for your comment!!

@toddspangler6669 2 года назад

So if house A has been depreciated for 10 years then you 1031 into house B, does Depreciation start at 10 yrs up to the 27.5 you are allowed to depreciate?