Depreciation recapture is the tax owed on the depreciation an owner has taken on a property over the years, collected when the property is sold. When a property is sold, depreciation is generally recaptured as taxable income unless the gain is deferred, for example through a 1031 exchange or a 721 exchange into an UPREIT.
Key Points
- Part of the tax bill on a sale: A sale can trigger federal capital gains tax on the gain, depreciation recapture on depreciation taken over the years, and state tax in many states.
- During the hold: While you hold a real estate investment, your share of the property’s depreciation can offset some or all of the taxable portion of distributions.
- Know your numbers: Your CPA can estimate the capital gains and depreciation recapture an exchange may defer, using your adjusted basis and the depreciation you have taken.
Nothing here is personalized tax advice; please talk with your own qualified tax advisor. To learn more, review the 1031 Exchange Checklist.
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