Depreciation recapture and capital gain on rental property

[ptax255]

Hi, can someone confirm the rules in the following scenario for a rental property:

Accumulated depreciation is $50,000.

Out of the $50,000 (allowable), $6,000 was used to lower rental income (allowed). $40,000 was carried over as unused loss

In the year of selling, is depreciation recapture $6K or $50K? Is it taxed at ordinary rate, up to 25%?

Does the capital gain calculation exclude the recapture amount?

[Terry53029]

For the rules on section 1250 property see pub 544 starting on page 28.

https://www.irs.gov/pub/irs-pdf/p544.pdf

[TaxGuyBill]

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@ptax255 wrote:

Hi, can someone confirm the rules in the following scenario for a rental property:

Accumulated depreciation is $50,000.

Out of the $50,000 (allowable), $6,000 was used to lower rental income (allowed). $40,000 was carried over as unused loss

In the year of selling, is depreciation recapture $6K or $50K? Is it taxed at ordinary rate, up to 25%?

Does the capital gain calculation exclude the recapture amount?

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$50,000.  In most cases, the "unused" $40,000 will be USED in the year it is sold.

Yes, ordinary rate up to 25%.

No, but if I suspect what you are trying to ask about capital gains, the answer is "yes".  Simple example:  House purchased for $200,000, sold for $300,000 and $50,000 of depreciation.  In that scenario, there is a gain of $150,000.  Of that $150,000 gain, $50,000 is Unrecaptured Section 1250 gain, taxed at up to 25%, and $100,000 will be long-term capital gain.

[ptax255]

Thank you for the detail. One more question, is the unused depreciation of $44,000** ($50-$6) now used to offset ordinary income? So technically a wash with that portion of recaptured depreciation?

[TaxGuyBill]

Yes, the Passive Loss carryover that is used offsets Ordinary Income.