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Lane
Lane , JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 9202
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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In what example would an individual need to retroactively recapture

Resolved Question:

In what example would an individual need to retroactively recapture depreciation? I am not familiar with the concept, and why many people are not familiar with the term "recap." Thank you.
Submitted: 3 years ago.
Category: Finance
Expert:  Lane replied 3 years ago.

NPVAdvisor :

Certain assets are depreciated for tax purposes. Depreciation is a way to get a tax deduction by spreading the cost of an asset over a period of time. As a result, depreciation reduces the asset's cost basis (adjusted cost basis).

NPVAdvisor :

When you eventually sell that asset, the gain on the sale will be higher (than simply sales price minus purchase price) since it's basis is now lower, because of the depreciation. How the gain is treated actually depends on the type of assset.

NPVAdvisor :

For people selling residential rental properties. Part of the gain will be taxed as a capital gain will qualify for the lower rate on long-term gains. However ... the part of the gain that is related to depreciation will be taxed at a maximum 25% rate. The technical term for gain related to depreciation on residential property is called unrecaptured section 1250 gain.

NPVAdvisor :

ON the plus side... when a rental property is sold, any passive activity losses that were not deductible in previous years become deductible in full. This can help offset the tax bite of this depreciation recapture tax.

NPVAdvisor :

As a "heads-up," some people try not to claim depreciation as a strategy to avoid the recapture tax. But this doesn't work, because the tax law requires depreciation recapture to be calculated on depreciation that was "allowed or allowable" (Internal Revenue Code section 1250(b)(3)).

NPVAdvisor :

So, good tax planning says you really should claim depreciation on your property to get a current tax deduction, since you're going to have to pay tax on the gain due to the depreciation, regardless of whether you actually took the depreciation deduction or not.

NPVAdvisor :

Hope this helps

NPVAdvisor :

Lane

Lane and other Finance Specialists are ready to help you
Expert:  Lane replied 3 years ago.

Hi Jake,

... just checking back in, as I never saw you come into the chat.

Let me know if you have further questions.

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.

But again, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Thanks,
Lane

Expert:  Lane replied 3 years ago.
Hi Jake,


I'm just following up with you to see how everything is going. Did my answer help?


Let me know,
Lane
Expert:  Lane replied 3 years ago.

Thanks for the feedback jake.

If you'd like to work with me again ...

Just say "For Lane only," at the beginning of your next question.


Thanks again,
Lane

Lane and other Finance Specialists are ready to help you