Comments on: Real Estate Investors’ Potential Tax Trap: Depreciation Recapture

By: Mike

Mike — Sat, 29 Jan 2011 21:51:45 +0000

Ray,

You’ll need to allocate a sale price among the assets (or at least of the asset “classes”). Capital improvements, like the roof replacement, will generally increase the basis in the building itself and the depreciation of that improvement will reduce the basis. As to applicances, a portion of the sale price would be separately allocated to those assets since they are a different class than the building. The allocation of the purchase price would be according to fair market value of the assets. Generally, for appliances, I would likely allocate a portion of the price equal to the adjusted basis–no gain; no loss. The remainder of the price is allocated between building and land using the percentage allocation used to calculate depreciation at purchase. All depreciation taken on the building and improvements would be subject to recapture with the remainder as capital gain; gain on the appliances, if any, would be ordinary income; gain on the land would be all capital gain.

By: Ray Graziano

Ray Graziano — Tue, 14 Dec 2010 16:27:11 +0000

I bought a 12 unit in 1978 and have fully depreciated the improvment, staraight line. I understand the 25% deprciation recapture and the 15% long term capital gain rate but what about all the purchased appliances, frunace, roof etc that have either been fully depreciated or not? Is there a difference if the improvements were depreciated on an accelerated vs. straigh line basis? Thanks for any help

By: Chris

Chris — Sun, 15 Mar 2009 01:37:27 +0000

Thanks Mike for clarifying something somewhat mystic.
I once depreciated and was hit with the huge tax bill when I took the profit. Another time I did not depreciate and was glad I did not get hit with the tax, but this clearly shows its better overall to take the depreciation. Just have the money to pay the IRS when you sell the building.

By: homeowner loan: Reporting Taxable Income and Expenses for Real Estate Investments « cbishop.cn

Tue, 10 Feb 2009 06:43:46 +0000

[...] Real Estate Investors’ Potential Tax Trap: Depreciation Recapture [...]

By: Emerald Isle

Emerald Isle — Mon, 06 Oct 2008 00:09:45 +0000

Does the recapture apply if your income is such that you can’t take the deduction?

By: Scottsdale Condos

Scottsdale Condos — Wed, 02 Jul 2008 17:03:38 +0000

Great post, I really enjoyed it. I will have to bookmark this site for later.

By: Fixemup Terry

Fixemup Terry — Sat, 05 Jan 2008 16:37:06 +0000

“Depreciation recapture” has always been low on my list of interesting real estate topics, somewhere down there by “grout”. Yet, your article did a great job of giving me a better appreciation of it.

I liked the point about using tomorrow’s dollars when you pay the recapture. Also, I wasn’t aware of the 1031 angle.

Good article!

By: Alex Morrow

Alex Morrow — Thu, 03 Jan 2008 21:54:36 +0000

Thanks Mike for writing this article. I truly appreciate it! It provides me with a better understanding of how depreciation hits you in the end.