Free Depreciation Recapture Calculator

Last updated on January 31st, 2020 at 07:07 pm

If you’re thinking about selling a personal residence or investment property, you need to know what depreciation recapture is. If you’re wondering how much depreciation recapture taxes you’ll owe, use our helpful depreciation recapture calculator below.

Depreciation Recapture FAQ

How do you calculate depreciation recapture?

Depreciation reflects the IRS‘ awareness that assets such as homes usually lose value over time. One of the biggest advantages of real estate is that you can claim depreciation as a cost, reducing your tax bill. The issue is that if you take a gain when you sell a depreciated asset, the IRS will “recapture” that original depreciation. Thus the term depreciation recapture!

It can be calculated fairly easily. Let’s say you buy a property for $200,000, and over a 10-year period you take $10,000 in depreciation each year. This means your cost basis in the property is now $0, and you’ve taken $200,000 in depreciation total.

If you sell the property for $300,000, you now owe taxes on ALL of the $200,000 of depreciation. This is taxed at your income tax rate, with a max of 25%. Assuming you are at the max tax bracket, you will owe $50,000 in depreciation recapture. This does NOT count capital gains tax. Keeping our same example, this person would owe $100,000 in capital gains ($300,000 sale price – $200,000 in depreciation recapture). Capital gains are taxed at your capital gains tax rate, usually lower than income tax rate.

What is the tax rate on depreciation recapture?

It is taxed at your income tax rate, with a maximum of 25%

How do you avoid paying depreciation recapture?

If you sell a business or rental property, you will avoid both capital gains and depreciation recapture taxes by exchanging your property for a similar property within 180 days. This like-kind exchange is called a 1031 exchange.

Do I pay depreciation recapture on a loss?

Believe it or not, there is a scenario where you pay depreciation recapture taxes, even after selling a property for a loss. For example, let’s say you bought a property for $300,000 and took $200,000 in depreciation over 10 years. Then, you sell the property for $250,000. Since your “cost basis” is $100,000, you still owe $150,000 in depreciation recapture, even though you’re losing money on the sale. Not fun!

Why is depreciation an expense?

Depreciation is an accounting concept that records how an asset’s valuable life declines over time. The purpose of recording depreciation as an expense is to spread the cost of its decline over its usable life.