hey Brendan, I am a graduate school student and I must say you were so clear and to the point in explaining what Depreciation Recapture Tax is. Thank you. Looking forward to watching more of your informative videos!
Excellent summary of recapture, just what I was looking for. As a real estate investor it amazes me how few people in the professional real estate business understand recapture even a little. I here many talk about depreciation like it is tax free write off. I even had a discussion with a cost seg sales guy who could not explain recapture. Thanks for the video!
Just found this channel and I got immense value, thank you so much! I have a question: Assuming all passive losses have been suspended for the duration of the property, upon sale - would the "suspended passive losses" negate the "depreciation recapture"? I need some help understanding the effect of this and any intricacies in tax liabilities, because right now they feel like opposite terms of the same meaning.
Hi Brandon, Thanks for the video. Can you explain where section 1245 and 1250 depreciation recapture are shown on a member's K-1 for the sale of a property owned by an LLC?
Thank you for doing this video. I was just discussing recapture with an investor friend last week. I will share this with him. I wonder if you can do another as a follow up to this video examples of tax calculations? Often when people are ready to sell, they would wonder if it is worth it to do a 1031 (while it’s not expensive, it’s not free and takes quite a bit of energy and time). Capital gain seems to have multiple brackets as well. So if you can have a video that explains the tax consequence of the capital gain and recapture using some sales examples, that would be great. Thank you
how do i find someone to do a cost segregation. I live in northeast PA and it seems like it's exotic trying to find someone to do this. Is there a certain type of profession that does this? Like an inspector or appraiser or engineer? I don't see the service advertised anywhere locally for me.
Thanks, Brandon. Great video. If you pass away and the property gets a step up in basis, is there is still a depreciation recapture? Also do you get to depreciated the property at the new stepped up basis value. thanks
Great video, I own a property for 15 yrs in California and it's a second home and never claim as a rental and never do a depreciation claim. How would I pay the depreciation recapture tax and how would it calculate if I didn't depreciate all these years? I am looking for an answer to this. thanks.
I wonder then - what if in cost seg, everything goes towards 15 year property. Does that get around this by making it 1250? Or once it is special / bonus depreciation, it is ordinary gains?
So I’ve heard option 2 described as a “lazy 1031.” I have a house I’m considering selling outright to move into a syndication deal (no 1031 because the value is too small). However I’ve 1031’d into the house and done a bonus depreciation on it this year!
Sold a rental condo that only had for 9 months (bought 5/21, sold 2/22). Did straight line depreciation for 2021. So even though I didn't use accelerated depreciation, I still have to add that depreciation to sale price (recapture), which will increase my tax liability on the sale? Thanks very much for your help.
Do you have training courses as well. I will be a new real estate investor this year. I want to specifically understand utilizing a MFH for the STR loophole. I know that it can be tricky and require very thorough planning. Thanks for your time.
Yes we do. We have an entire course on the STR Loophole. It's part of our Tax Smart Insiders community. You can learn more and join today by visiting www.taxsmartinvestors.com/become-an-insider
Hi, I just wanted to clarify you said that depreciation is like a loan from the IRS. How does that work am I allowed to use that ”loan” for business purposes.
Great content. Do you know of any recommended companies to perform these cost segregation studies for a small residential property like a duplex in California?
I have a question about doing the 1031 - if the value of the new property is significantly higher than the initial value of the one you sold, are you able to capture that in an additional cost segregation study on the new property?
What about recapturing of depreciation if you just rented a room (not a rental property)? Mother rented a room and the accountant depreciated the sqft of the rooms that were rented (so it wasn't a "rental property") It was her primary home (still is) The house is in a revocable trust, going to my wife (sole beneficiary) So when we go to sell the house once it's passed down in the trust to my wife. Will she had to pay the recapture of depreciation? Don't even have a clue what those numbers are. I just know they depreciated the sqft of the room when I came across some old returns. Thanks
What he is saying is - the depreciation will be offset when the owner sell his property and presumably there is an appreciation in value when he sell. THEN you have to pay the taxes based on the view that the owner have gained. But some owners may not actually gain on their properties especially in this market.
Question: I have a personal car I have been using for 3 year. Next year my wife plans to user this car for her business 100% of the times. How would I calculate depreciation? Do I need to sell the car to her first or can she take the estimated cost of the car from KBB and calculate depreciation via actual expense method.?
Question when considering depreciation recapture. If the real estate was run down and the value was pretty close to what it was depreciated to, then it cost about as much in repairs to get it to a sellable state, does the cost of repair adjust the basis back up? Or is it just reducing the capital gain calculated?
I’m going to try a question. Ex. bought a property in for 130,000 and have been depreciated $4700 a year for 15 years. No significant improvements and have just paid taxes and cost of renting it out. Paid taxes on rental income. If I would sell it after 15 years for $400,000 how much would I owe for recapture assuming 15% tax bracket? What about capital gains? I’m confused a little.
assuming you took $4700 for 15 years you'd have accumulated depreciation of $70,500. Thus your cost basis is $59,500 and total gain of $340,500. Depreciation recapture is generally taxed as ordinary income up to a maximum rate of 25% so multiply your ordinary tax rate by $70,500. There is no 15% ordinary bracket, but say your in the 22% ordinary bracket, the tax would be $15,510 The remaining 270,000 capital gain would be taxed at the 15% cap gain bracket and result in $40,500 in tax
Wow! I was hoping for an answer but never expected one! Especially an answer so soon and understandable! Thank you! I subscribed to your channel. Thanks again!
I have quick question on depreciation recapture. Scenario: Owner occupied duplex for 20 years. Depreciation claimed on the rental (1/3 of building). In year 21, owner moves out and rents both units. If selling the property 5 years later (after the allowable primary residence exemption on the lower unit), would the depreciation recapture be calculated on what was taken on the 20 years of returns, or will it be a blanket 25% of the sale price - the cost of purchase. I hope that makes some sense.
If you have passive losses from the activity that generated the depreciation recapture or other passive activities losses, can this offset or reduce the depreciation recapture?
What can you do if your depreciation amount was in excess of the taxes you took out? Can you reclaim the rest in the taxes next year? For example: I had 60k bonus depreciation but my accountant only got me $27k return because my actual income was not high enough.
Thanks for the content. Quick question - If AGI is over 150K, then the depreciation is non-deductible on passive real-estate investments - I understand the unutilized losses can be used against future profits from rent and even against some K-1 income. However, can unutilized losses be used to offset capital gains when selling the property (assuming no 1031)?
Thank you so much for this wonderful material….Is it true that 1245 property held for more than 3 years becomes 1231 and gets taxed as capital gain on recapture?
Great video Brandon. Do you happen to have (or know of) a calculator I could use to determine specific depreciation recapture on the sale of a property? I know you explained it in your video, but a tool like that would be handy. Thx.
If one had unusually low earned income it appears that one could be in the zero tax bracket for cap gains and thus avoid all or most cap gains tax as well as dep recapture tax as well?
This was awesome! I am an interior designer turned, REI turned note investor. This was so helpful in getting my brain wrapped around the topic of recapture. I have one big question, why didn't you mention an installment sale? Either through straight owner financing or an installment sales trust? Those are two viable additional options, yes? or am I off my rocker? :)
I heard installment sale triggers depreciation recapture and is not eligible for 1031 exchange treatment since it is not a complete exchange within the 1031 window
I was going to mention installment sale too, but just to cite that depreciation recapture cannot be deferred to later years via an installment sale, only capital gain
If you put the property in the trust and you pass away, now your son owns your property. Does that free my son from depreciation recapture? Or can he accelerated depreciation again?
Hi Brandon, I love your page and content! I had a question about the 1031 exchange strategy. I assumed the 1031 exchange was only for the capital gain earned when sold, how would depreciation create a gain that can be rolled forward? Does depreciation normally create a loss?
So if house A has been depreciated for 10 years then you 1031 into house B, does Depreciation start at 10 yrs up to the 27.5 you are allowed to depreciate?
Thanks for the explanation. Consider the following scenario: one generates 10k in cash flow and is able to not pay tax on it after claiming a 20k in depreciation during the holding period. If I hear it correctly, you would get taxed on the 20k total depreciation at sale, not the 10k taxable cash flow the depreciation offsets?
It should be your capital loss. Eg. My car cost was 10k. Depreciation amt is 8k. My adjusted base is now 2k which is an ordinary income now. 7:57 If I sell the car at 14k , my capital gain applicable for concessional tax will be 2k ( 4K margin minus 2k adjusted base) hope it makes sense.
I had a question not sure if you guys know the answer to this Basically let say you have a trucking business 1. Buy a truck for 150k Are you allowed to depreciate the truck if you want for 3,4 or 5 years ? 2. Let's say you depreciate over 4 years because when you plan to sell it that is 37,500 depreciation yearly 3. Now on year 5 since you are done with it you plan to sell it and now its worth 30k for example the truck that is Is the 30k captured as a pure profit? Obviously you are going buy a NEW TRUCK as a business owner But for the sake of argument is 30k a profit? Does depreciation capture the full cost of the truck over the lifetime of the TRUCK
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hey Brendan, I am a graduate school student and I must say you were so clear and to the point in explaining what Depreciation Recapture Tax is. Thank you. Looking forward to watching more of your informative videos!
Excellent summary of recapture, just what I was looking for. As a real estate investor it amazes me how few people in the professional real estate business understand recapture even a little. I here many talk about depreciation like it is tax free write off. I even had a discussion with a cost seg sales guy who could not explain recapture. Thanks for the video!
Thank you for your kind words!
Sounds like I will pay a huge tax when I sell my rental home. Good information.
Just found this channel and I got immense value, thank you so much! I have a question:
Assuming all passive losses have been suspended for the duration of the property, upon sale - would the "suspended passive losses" negate the "depreciation recapture"? I need some help understanding the effect of this and any intricacies in tax liabilities, because right now they feel like opposite terms of the same meaning.
Hi Brandon, Thanks for the video. Can you explain where section 1245 and 1250 depreciation recapture are shown on a member's K-1 for the sale of a property owned by an LLC?
Thank you for doing this video. I was just discussing recapture with an investor friend last week. I will share this with him. I wonder if you can do another as a follow up to this video examples of tax calculations? Often when people are ready to sell, they would wonder if it is worth it to do a 1031 (while it’s not expensive, it’s not free and takes quite a bit of energy and time). Capital gain seems to have multiple brackets as well. So if you can have a video that explains the tax consequence of the capital gain and recapture using some sales examples, that would be great. Thank you
how do i find someone to do a cost segregation. I live in northeast PA and it seems like it's exotic trying to find someone to do this. Is there a certain type of profession that does this? Like an inspector or appraiser or engineer? I don't see the service advertised anywhere locally for me.
Thanks, Brandon. Great video. If you pass away and the property gets a step up in basis, is there is still a depreciation recapture? Also do you get to depreciated the property at the new stepped up basis value. thanks
This is a great question. I hope he answers!
Great video, I own a property for 15 yrs in California and it's a second home and never claim as a rental and never do a depreciation claim. How would I pay the depreciation recapture tax and how would it calculate if I didn't depreciate all these years? I am looking for an answer to this. thanks.
What’s the point of claiming depreciation if you have to pay it back?
I wonder then - what if in cost seg, everything goes towards 15 year property. Does that get around this by making it 1250? Or once it is special / bonus depreciation, it is ordinary gains?
So I’ve heard option 2 described as a “lazy 1031.” I have a house I’m considering selling outright to move into a syndication deal (no 1031 because the value is too small). However I’ve 1031’d into the house and done a bonus depreciation on it this year!
I love the way you explained it.
It is very clear about the depreciation recapture for bonus depreciation!!!! Thanks
Been looking for a simplified explanation after my bonus cost seg. Thanks
Thanks for sharing. Great info
Sold a rental condo that only had for 9 months (bought 5/21, sold 2/22). Did straight line depreciation for 2021. So even though I didn't use accelerated depreciation, I still have to add that depreciation to sale price (recapture), which will increase my tax liability on the sale? Thanks very much for your help.
Do you have training courses as well. I will be a new real estate investor this year. I want to specifically understand utilizing a MFH for the STR loophole. I know that it can be tricky and require very thorough planning. Thanks for your time.
Yes we do. We have an entire course on the STR Loophole. It's part of our Tax Smart Insiders community. You can learn more and join today by visiting www.taxsmartinvestors.com/become-an-insider
Hi, I just wanted to clarify you said that depreciation is like a loan from the IRS. How does that work am I allowed to use that ”loan” for business purposes.
Great content. Do you know of any recommended companies to perform these cost segregation studies for a small residential property like a duplex in California?
Thanks! I wasn’t aware that the bonus depreciation recapture will be taxed at a higher rate than the typical depreciation.
I have a question about doing the 1031 - if the value of the new property is significantly higher than the initial value of the one you sold, are you able to capture that in an additional cost segregation study on the new property?
What about recapturing of depreciation if you just rented a room (not a rental property)? Mother rented a room and the accountant depreciated the sqft of the rooms that were rented (so it wasn't a "rental property") It was her primary home (still is) The house is in a revocable trust, going to my wife (sole beneficiary) So when we go to sell the house once it's passed down in the trust to my wife. Will she had to pay the recapture of depreciation? Don't even have a clue what those numbers are. I just know they depreciated the sqft of the room when I came across some old returns. Thanks
What he is saying is - the depreciation will be offset when the owner sell his property and presumably there is an appreciation in value when he sell. THEN you have to pay the taxes based on the view that the owner have gained. But some owners may not actually gain on their properties especially in this market.
Great explanation, especially without the benefit of a dry erase board graphic. Well done!
What valuation or who conducts the evaluation for unrecaptured 1250 gain?
Thanks
Thank you.
Very clear on 1250 recapture.
Glad it helped!
Question: I have a personal car I have been using for 3 year. Next year my wife plans to user this car for her business 100% of the times. How would I calculate depreciation? Do I need to sell the car to her first or can she take the estimated cost of the car from KBB and calculate depreciation via actual expense method.?
Great video. Thanks for all you do!
My pleasure!
Question when considering depreciation recapture. If the real estate was run down and the value was pretty close to what it was depreciated to, then it cost about as much in repairs to get it to a sellable state, does the cost of repair adjust the basis back up? Or is it just reducing the capital gain calculated?
I’m going to try a question. Ex. bought a property in for 130,000 and have been depreciated $4700 a year for 15 years. No significant improvements and have just paid taxes and cost of renting it out. Paid taxes on rental income. If I would sell it after 15 years for $400,000 how much would I owe for recapture assuming 15% tax bracket? What about capital gains? I’m confused a little.
assuming you took $4700 for 15 years you'd have accumulated depreciation of $70,500.
Thus your cost basis is $59,500 and total gain of $340,500.
Depreciation recapture is generally taxed as ordinary income up to a maximum rate of 25% so multiply your ordinary tax rate by $70,500.
There is no 15% ordinary bracket, but say your in the 22% ordinary bracket, the tax would be $15,510
The remaining 270,000 capital gain would be taxed at the 15% cap gain bracket and result in $40,500 in tax
Wow! I was hoping for an answer but never expected one! Especially an answer so soon and understandable! Thank you! I subscribed to your channel. Thanks again!
Awesome info thanks!
Does land improvement (15 years) fall under unrecaptured Sec. 1250 gain? Thanks.
Can you depreciate condos the same way?
I have quick question on depreciation recapture. Scenario: Owner occupied duplex for 20 years. Depreciation claimed on the rental (1/3 of building). In year 21, owner moves out and rents both units. If selling the property 5 years later (after the allowable primary residence exemption on the lower unit), would the depreciation recapture be calculated on what was taken on the 20 years of returns, or will it be a blanket 25% of the sale price - the cost of purchase. I hope that makes some sense.
If you have passive losses from the activity that generated the depreciation recapture or other passive activities losses, can this offset or reduce the depreciation recapture?
Yes!
Is this also true for BONUS depreciation recapture?
So if you sell the property after 27.5 years. There will be no depreciation recapture?
How would the depreciation recapture work for a car rental business?
What can you do if your depreciation amount was in excess of the taxes you took out? Can you reclaim the rest in the taxes next year? For example: I had 60k bonus depreciation but my accountant only got me $27k return because my actual income was not high enough.
If the max tax for unrecapture 1250 is 25% where is the income threshold where the unrecapture is less than 25%?
How much depreciation for a commercial property that was built in 1990. The cost without land is: $650,477 ? Thank you
Thanks for the content. Quick question - If AGI is over 150K, then the depreciation is non-deductible on passive real-estate investments - I understand the unutilized losses can be used against future profits from rent and even against some K-1 income. However, can unutilized losses be used to offset capital gains when selling the property (assuming no 1031)?
Generally yes
Thank you so much for this wonderful material….Is it true that 1245 property held for more than 3 years becomes 1231 and gets taxed as capital gain on recapture?
Great video Brandon. Do you happen to have (or know of) a calculator I could use to determine specific depreciation recapture on the sale of a property? I know you explained it in your video, but a tool like that would be handy. Thx.
I don't know of one off hand but your tax advisor should be able to project it for you (since the depreciation has been logged in their software)
If one had unusually low earned income it appears that one could be in the zero tax bracket for cap gains and thus avoid all or most cap gains tax as well as dep recapture tax as well?
How do depreciation and recapture of a gifted property turned a rental work?
This was awesome! I am an interior designer turned, REI turned note investor. This was so helpful in getting my brain wrapped around the topic of recapture. I have one big question, why didn't you mention an installment sale? Either through straight owner financing or an installment sales trust? Those are two viable additional options, yes? or am I off my rocker? :)
I heard installment sale triggers depreciation recapture and is not eligible for 1031 exchange treatment since it is not a complete exchange within the 1031 window
I was going to mention installment sale too, but just to cite that depreciation recapture cannot be deferred to later years via an installment sale, only capital gain
What happens if I retire my rental and move in?
If you put the property in the trust and you pass away, now your son owns your property. Does that free my son from depreciation recapture? Or can he accelerated depreciation again?
You carry it to the grave
Hi Brandon, I love your page and content! I had a question about the 1031 exchange strategy. I assumed the 1031 exchange was only for the capital gain earned when sold, how would depreciation create a gain that can be rolled forward? Does depreciation normally create a loss?
Gain from depreciation (depreciation recapture) can be rolled forward in a 1031. Thanks for your comment!!
So if house A has been depreciated for 10 years then you 1031 into house B, does Depreciation start at 10 yrs up to the 27.5 you are allowed to depreciate?
Thanks for the explanation. Consider the following scenario: one generates 10k in cash flow and is able to not pay tax on it after claiming a 20k in depreciation during the holding period. If I hear it correctly, you would get taxed on the 20k total depreciation at sale, not the 10k taxable cash flow the depreciation offsets?
Add them together: the cash profit / gain + the depreciation previously deducted.
Great videos.
What if I don’t want to depreciate cause I have no intentions of taking a loan from the government
It’s certainly what it sounds like.. They give with one hand and take with another 🤔
Could have claimed. IRS treats the asset as if you took depreciation even if you didn't claim the depreciation. Get a good CPA.
If “recapture” applies to the basis of purchase; what happens, when sold less than original purchase?
It should be your capital loss. Eg. My car cost was 10k. Depreciation amt is 8k. My adjusted base is now 2k which is an ordinary income now. 7:57 If I sell the car at 14k , my capital gain applicable for concessional tax will be 2k ( 4K margin minus 2k adjusted base) hope it makes sense.
I had a question not sure if you guys know the answer to this
Basically let say you have a trucking business
1. Buy a truck for 150k
Are you allowed to depreciate the truck if you want for 3,4 or 5 years ?
2. Let's say you depreciate over 4 years because when you plan to sell it that is 37,500 depreciation yearly
3. Now on year 5 since you are done with it you plan to sell it and now its worth 30k for example the truck that is
Is the 30k captured as a pure profit? Obviously you are going buy a NEW TRUCK as a business owner
But for the sake of argument is 30k a profit?
Does depreciation capture the full cost of the truck over the lifetime of the TRUCK
Yet another reason to abolish the IRS. ;)
YOU HAVE TO DEPRECIATE IT!!!this is important...I DID NOT!!!!already had it 5 years!,,,now what?Its aSHORT TERM
And I made a little money from my rental house, anddddddd it’s gone!!!
❤
You need a whiteboard or iPad to explain this. Not helpful.