Selling my rental… how does depreciation recapture work?

General
1

Hi everyone,

I’m selling my rental property and trying to figure out how depreciation recapture works. Here’s my situation:

  • Cost basis is $185K
  • I made $15K in improvements over 10 years

How do I calculate my tax bill using 27.5-year straight-line depreciation for both the original cost basis and the improvements (on different schedules)?

Also, can depreciation recapture be offset by capital losses elsewhere?

2

This might help: The Ultimate Depreciation Recapture Calculator

3

Axel said:
This might help: The Ultimate Depreciation Recapture Calculator

Thanks for the link! For my second question, can capital losses fully offset the depreciation recapture tax, or do they only offset the capital gain part?

4

@Levi
If your total net capital loss for the year is over $3,000, only $3,000 can offset other income like depreciation recapture. The rest carries forward.

5

Vail said:
@Levi
If your total net capital loss for the year is over $3,000, only $3,000 can offset other income like depreciation recapture. The rest carries forward.

I’ve got a capital loss carryover that could cover the depreciation recapture. Can it fully cover it or is it capped at $3K?

6

@Levi
No, it doesn’t work that way. Depreciation recapture is treated as ordinary income, not a capital gain. You can only offset $3,000 of the capital loss against other income per year.

7

Axel said:
@Levi
No, it doesn’t work that way. Depreciation recapture is treated as ordinary income, not a capital gain. You can only offset $3,000 of the capital loss against other income per year.

Thanks, that clears it up. Depreciation recapture being taxed as income makes sense. My confusion was because I thought section 1231 losses might work here, but my stock losses aren’t section 1231.

8

Axel said:
@Levi
No, it doesn’t work that way. Depreciation recapture is treated as ordinary income, not a capital gain. You can only offset $3,000 of the capital loss against other income per year.

One last thing… if I use capital losses to offset the entire capital gain from the property sale, will there still be depreciation recapture?

9

@Levi
They’re separate issues. The capital loss reduces how much tax you pay on the gain, but it doesn’t affect the gain itself. If you sell at a loss, recapture might not apply. Check your exact numbers to be sure.

Here’s a link that explains it: 26 U.S. Code § 1250 - Gain from dispositions of certain depreciable realty | U.S. Code | US Law | LII / Legal Information Institute

10

@Axel
Got it now. Thanks for walking me through this!

11

Axel said:
@Levi
No, it doesn’t work that way. Depreciation recapture is treated as ordinary income, not a capital gain. You can only offset $3,000 of the capital loss against other income per year.

Actually, straight-line depreciation recapture (section 1250 gain) is a type of capital gain and can be offset by capital losses.

12

@Levi
You can use capital loss carryover to offset depreciation recapture, but only for straight-line depreciation on real estate.

13

Ashwin said:
@Levi
You can use capital loss carryover to offset depreciation recapture, but only for straight-line depreciation on real estate.

The resources I’ve found say section 1250 gains can be offset by section 1231 losses, but my capital losses are from stocks and don’t fall under section 1231. So I’m guessing they won’t work here.