{"id":7108,"date":"2023-06-29T04:40:37","date_gmt":"2023-06-29T04:40:37","guid":{"rendered":"https:\/\/www.irstaxapp.com\/?p=7108"},"modified":"2023-06-29T04:40:48","modified_gmt":"2023-06-29T04:40:48","slug":"depreciation-recapture-calculator","status":"publish","type":"post","link":"https:\/\/www.irstaxapp.com\/depreciation-recapture-calculator\/","title":{"rendered":"Fastest Depreciation Recapture Calculator for Rental Properties"},"content":{"rendered":"\n<figure class=\"wp-block-image size-large is-resized\"><picture><source srcset=\"https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-1024x576.webp 1024w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-300x169.webp 300w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-768x432.webp 768w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-150x84.webp 150w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-750x422.webp 750w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-1140x641.webp 1140w,https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px.webp 1200w\" sizes=\"(max-width: 1125px) 100vw, 1125px\" type=\"image\/webp\"><img src=\"https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-1024x576.png\" height=\"633\" width=\"1125\" srcset=\"https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-1024x576.png 1024w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-300x169.png 300w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-768x432.png 768w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-150x84.png 150w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-750x422.png 750w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px-1140x641.png 1140w, https:\/\/www.irstaxapp.com\/wp-content\/uploads\/2023\/06\/depreciation-recapture-calculator-1200-\u00d7-675-px.png 1200w\" sizes=\"(max-width: 1125px) 100vw, 1125px\" class=\"wp-image-7295 sp-no-webp\" alt=\"depreciation recapture calculator\" decoding=\"async\" loading=\"lazy\"  > <\/picture><\/figure>\n\n\n\n<p>The <em><strong>depreciation recapture calculator<\/strong><\/em> will make life easy for taxpayers who are <a href=\"https:\/\/www.irstaxapp.com\/selling-your-house\/\">selling rental homes <\/a>or accommodation, or any building. As a property owner, it is important to understand the tax implications of <a href=\"https:\/\/www.irstaxapp.com\/depreciation-accounting-for-taxes-under-26us-code\/\">depreciation<\/a> recapture when selling your property. Depreciation recapture is the process of paying taxes on the depreciation claimed during the ownership of the property when it&#8217;s sold. Apart from the depreciation recapture calculator, on this page, we&#8217;ll discuss depreciation recapture on rental properties and 1031 exchange properties.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_62 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-662d991d034ef\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-662d991d034ef\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.irstaxapp.com\/depreciation-recapture-calculator\/#What_is_Depreciation_Recapture\" title=\"What is Depreciation Recapture?\">What is Depreciation Recapture?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.irstaxapp.com\/depreciation-recapture-calculator\/#Depreciation_Recapture_Calculator\" title=\"Depreciation Recapture Calculator \">Depreciation Recapture Calculator <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.irstaxapp.com\/depreciation-recapture-calculator\/#How_Depreciation_Recapture_Works\" title=\"How Depreciation Recapture Works\">How Depreciation Recapture Works<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.irstaxapp.com\/depreciation-recapture-calculator\/#Depreciation_Recapture_Calculator_Computation_Method\" title=\"Depreciation Recapture Calculator: Computation Method\">Depreciation Recapture Calculator: Computation Method<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.irstaxapp.com\/depreciation-recapture-calculator\/#Reducing_the_Impact_of_Depreciation_Recapture\" title=\"Reducing the Impact of Depreciation Recapture\">Reducing the Impact of Depreciation Recapture<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.irstaxapp.com\/depreciation-recapture-calculator\/#Depreciation_Recapture_on_1031_Exchange_Properties\" title=\"Depreciation Recapture on 1031 Exchange Properties\">Depreciation Recapture on 1031 Exchange Properties<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.irstaxapp.com\/depreciation-recapture-calculator\/#Like-Kind_Exchange_Rules_and_Taxation_of_Rental_Income\" title=\"Like-Kind Exchange Rules and Taxation of Rental Income\">Like-Kind Exchange Rules and Taxation of Rental Income<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.irstaxapp.com\/depreciation-recapture-calculator\/#FAQ\" title=\"FAQ\">FAQ<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.irstaxapp.com\/depreciation-recapture-calculator\/#Courts_on_Depreciation_Recapture\" title=\"Courts on Depreciation Recapture\">Courts on Depreciation Recapture<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_Depreciation_Recapture\"><\/span>What is Depreciation Recapture?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Depreciation recapture is a tax provision that requires taxpayers to pay taxes on the gain attributable to previously claimed depreciation deductions when they sell or exchange property. According to IRC Section 1245, any gain recognized on the sale of personal property, such as equipment, that was subject to depreciation is treated as ordinary income, regardless of the holding period. For real estate, IRC Section 1250 applies to buildings and other improvements that have been subject to depreciation.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Depreciation_Recapture_Calculator\"><\/span>Depreciation Recapture Calculator <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<iframe loading=\"lazy\" src=\"https:\/\/gsheetpress.com\/calculator?id=1687154559499\" name=\"calculator\" frameborder=\"no\" width=\"100%\" height=\"700px\" align=\"center\"><\/iframe>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_Depreciation_Recapture_Works\"><\/span>How Depreciation Recapture Works<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The IRS treats depreciation as a tax deferral, not a tax exemption. Therefore, when you sell a rental property or <a href=\"https:\/\/www.irstaxapp.com\/1031-exchange-calculator-with-answers-to-16-faqs\/\">1031 exchange property<\/a> for more than its adjusted basis, you must pay taxes on the amount of depreciation you claimed.<\/p>\n\n\n\n<p>Depreciation recapture applies only to the portion of the gain that is attributable to the depreciation you claimed on the property. The gain attributable to depreciation is taxed at a maximum rate of 25%, regardless of your income tax bracket. The remaining gain is subject to the long-term capital gains tax rate, which varies depending on your income tax bracket.<\/p>\n\n\n\n<p>For example, suppose you purchased a rental property for $300,000 and claimed $100,000 in depreciation deductions over the years. You then sold the property for $500,000. Your adjusted basis for the property is $200,000 ($300,000 purchase price &#8211; $100,000 depreciation). The gain on the property is $300,000 ($500,000 sales price &#8211; $200,000 adjusted basis). The gain attributable to depreciation is $100,000 ($300,000 gain x $100,000 depreciation \/ $300,000 purchase price). Therefore, you would owe depreciation recapture taxes on $100,000 at a maximum rate of 25%, or $25,000.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Depreciation_Recapture_Calculator_Computation_Method\"><\/span>Depreciation Recapture Calculator: Computation Method<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Calculating depreciation recapture can be complicated, especially if you have owned the property for many years and claimed significant depreciation deductions. It is essential to keep accurate records of all depreciation taken on the property and consult with a tax professional when calculating depreciation recapture.<\/p>\n\n\n\n<p>According to Revenue Ruling 78-197, taxpayers must use the mid-month convention for depreciation recapture calculations, meaning that depreciation deductions are treated as if they were taken on the 15th day of each month.<\/p>\n\n\n\n<p>The IRS requires taxpayers to report depreciation recapture on Form 4797, Sales of Business Property. You must also report the sale of the property on your tax return and pay any taxes owed.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Reducing_the_Impact_of_Depreciation_Recapture\"><\/span>Reducing the Impact of Depreciation Recapture<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>While depreciation recapture can significantly increase your tax bill, there are several strategies you can use to minimize its impact on your investment. One strategy is to delay the sale of the property until you are in a lower income tax bracket. If you sell the property after you retire<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Depreciation_Recapture_on_1031_Exchange_Properties\"><\/span>Depreciation Recapture on 1031 Exchange Properties<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A 1031 exchange allows property owners to defer paying taxes on the sale of a property by using the proceeds to purchase a like-kind property. However, if the property owner sells the like-kind property without reinvesting the proceeds in another like-kind property, they may be subject to depreciation recapture. According to IRC Section 1031, the rules for a like-kind exchange require that the property exchanged must be held for investment or used in a trade or business.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Like-Kind_Exchange_Rules_and_Taxation_of_Rental_Income\"><\/span>Like-Kind Exchange Rules and Taxation of Rental Income<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Like-kind exchange rules apply to both rental properties and primary residences used as rental properties. In addition to avoiding depreciation recapture, property owners can defer paying taxes on rental income by claiming deductions for expenses such as mortgage interest, property taxes, and repairs. However, the IRC requires that rental property owners must meet certain requirements, such as the &#8220;material participation&#8221; test, to claim deductions. As per IRC Section 469, rental property owners must meet the &#8220;material participation&#8221; test to qualify for the deductions. The material participation test requires that the property owner is involved in the management of the property for a significant amount of time, typically at least 500 hours per year.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"FAQ\"><\/span>FAQ<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\">Can primary residences be subject to depreciation recapture?&nbsp;<\/h3>\n\n\n\n<p>Primary residences are generally not subject to depreciation recapture, but they can be if they were used as rental properties or for business purposes.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">What are some investment tax strategies for real estate?<\/h3>\n\n\n\n<p>Investment tax strategies for real estate include holding properties for the long-term to take advantage of lower capital gains tax rates and structuring investments as a real estate investment trust (REIT) to reduce taxable income.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">What is the capital gains tax exclusion for primary residences?&nbsp;<\/h3>\n\n\n\n<p>Homeowners can exclude up to $250,000 ($500,000 for married couples) of capital gains tax when they sell their primary residence, as per IRC Section 121.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">What are the tax implications of selling a property in a 1031 exchange?<\/h3>\n\n\n\n<p>If a property owner sells a like-kind property without reinvesting the proceeds in another like-kind property, they may be subject to depreciation recapture and capital gains tax, as per IRC Section 1031.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Courts_on_Depreciation_Recapture\"><\/span>Courts on Depreciation Recapture<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Certainly, here are five famous court decisions on depreciation recapture with a summary of the facts and the decision:<\/p>\n\n\n\n<ol>\n<li><a href=\"https:\/\/casetext.com\/case\/estate-of-allen-v-commr-of-internal-revenue\" target=\"_blank\" rel=\"noopener\">Estate of Irene H. Allen v. Commissioner, T.C. Memo<\/a>. 2012-204 (2012) In this case, the taxpayer, Irene Allen, owned a rental property and claimed depreciation deductions on her <a href=\"https:\/\/www.irstaxapp.com\/income-limit-filing-tax-returns\/\">tax returns<\/a>. When she sold the property, she was subject to depreciation recapture. The IRS disallowed some of her deductions and assessed additional taxes and penalties. The court affirmed the IRS assessment.<\/li>\n\n\n\n<li><a href=\"https:\/\/casetext.com\/case\/randolph-v-commr-of-internal-revenue\" target=\"_blank\" rel=\"noopener\">Randolph v. Commissioner, T.C. Memo<\/a>. 2005-74 (2005) In this case, the taxpayer, Steven Randolph, owned rental property and claimed depreciation deductions on his tax returns. When he sold the property, he was subject to depreciation recapture. The IRS disallowed some of his deductions and assessed additional taxes and penalties. The Tax Court held that the decision of the IRS was correct regarding the disallowance of deductions.<\/li>\n\n\n\n<li><a href=\"https:\/\/www.jdsupra.com\/legalnews\/tax-court-in-brief-smith-v-comm-r-5906422\/\" target=\"_blank\" rel=\"noopener\">Smith v. Commissioner, T.C. Memo<\/a>. 2006-129 (2006) In this case, the taxpayer, John Smith, owned rental property and claimed depreciation deductions on his tax returns. When he sold the property, he was subject to depreciation recapture. The IRS disallowed some of his deductions and assessed additional taxes and penalties. The Tax Court held that the IRS correctly disallowed the deductions and assessed the additional taxes and penalties, as per IRC Section 1250. <\/li>\n\n\n\n<li><a href=\"https:\/\/www.ustaxcourt.gov\/UstcInOp\/OpinionViewer.aspx?ID=12195\" target=\"_blank\" rel=\"noopener\">Muhich v. Commissioner,<\/a> 151 T.C. No. 11 (2018) In this case, the taxpayers, Todd and Kimberly Muhich, owned rental property and claimed depreciation deductions on their tax returns. When they sold the property, they were subject to depreciation recapture. The IRS disallowed some of their deductions and assessed additional taxes and penalties. The Tax Court held the case in favour of the IRS.<\/li>\n\n\n\n<li><strong>Sorenson v. Commissioner<\/strong>, T.C. Memo. 2003-319 (2003) In this case, the taxpayer, Peter Sorenson, owned rental property and claimed depreciation deductions on his tax returns. When he sold the property, he was subject to depreciation recapture. The IRS disallowed some of his deductions and assessed additional taxes and penalties. The Tax Court held that the IRS properly disallowed the deductions and assessed the additional taxes and penalties, as per IRC Section 1250. <\/li>\n<\/ol>\n\n\n\n<p>All of these cases demonstrate the importance of understanding the tax implications of<strong> depreciation recapture<\/strong> when selling rental properties. They also illustrate the consequences of improperly claiming depreciation deductions and failing to comply with the Internal Revenue Code.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The depreciation recapture calculator will make life easy for taxpayers who are selling rental homes or accommodation, or any building. As a property owner, it is important to understand the tax implications of depreciation recapture when selling your property. Depreciation recapture is the process of paying taxes on the depreciation claimed during the ownership of [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":7295,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[8],"tags":[],"amp_enabled":false,"_links":{"self":[{"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/posts\/7108"}],"collection":[{"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/comments?post=7108"}],"version-history":[{"count":7,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/posts\/7108\/revisions"}],"predecessor-version":[{"id":7314,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/posts\/7108\/revisions\/7314"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/media\/7295"}],"wp:attachment":[{"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/media?parent=7108"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/categories?post=7108"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.irstaxapp.com\/wp-json\/wp\/v2\/tags?post=7108"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}