Have a Tax Question? Ask a Tax Expert
Please don't shoot the messenger here, but it really works the other way around;
Since you get to write off an expense without actually spending money, depreciation should be a benefit to you for as long as you own the property and it still has value to depreciate. You don't need to worry about paying it back until you sell the property. That's when you actually experience a taxable event and can incur a gain.
Because depreciation is an accounting tool that lets you adjust value for "using up" the value of your asset, the IRS expects that you will sell it for less than the depreciated value. If you sell your asset for more that its depreciated value, the IRS requires you to pay it tax on that gain. This tax is called "Depreciation Recapture Tax" and is also referred to as Section 1250 recapture.
The tax rate on recaptured deprecation is 25 percent. (This comes under Title 26 of the US code - the internal revenue code) section 1250 ... IRC § 1250
Here's an example from an excellent article on this: from http://homeguides.sfgate.com/paying-back-depreciation-rental-property-42080.html
Consider a rental property that you bought 15 years ago for $250,000 and just sold for $350,000. Your analysis showed that $180,000 of the value was in the depreciable buillding and $70,000 was in non-depreciable land. You would have a $100,000 capital gain on the difference between the original purchase price and the selling price, taxable at 15 percent in the 2012 tax year. In addition, the $6,545 per year depreciation that you claimed based on the asset's 27.5 year life, which adds up to $98,175, is taxable at 25 percent as recapture. This leads to a total tax bill on the sale of $39,544, based on $15,000 in gains tax and $24,544 in recapture tax.
And here's the IRS guidance on this:
I still don't see you coming into the chat session, so I'll move us to the "Q&A" mode. … Maybe that will help … (We can still continue a dialogue there, just not in real-time chat, as we can here)
Please let me know if you have any questions at all ...
Let me know …
Please let me know if you need anything else at all on this.
Did you get my last message regarding accumulated book loses?
What about change from rental to second home and can losses be deducted from 1250 gain
Does that mean that there is no penalty for converting to personal use upon sale. i.e. the taxes I would incur on sale would be the same whether I converted it to second home or left it as a rental property until sale?
Can the accumulated losses be deducted from the 1250 gain first to avoid the higher tax rate?
The portion of Accumulated Depreciation which corresponds to straight line depreciation is called "Unrecaptured Section 1250 Gain"
That's the 25% piece. (the logic/policy here is that you took the depreciation at ordinary income tax rates... the 25% is essentially a surrogate for ordinary income rates)
The remainder of any gain realized is considered long-term capital gain, provided the property was held over a year, and is taxed at a capital gains rates.
Can i copy the responses you've sent?
HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.
Lane, thanks for your help. One last question. Do I need to notify the IRS when I convert or do I just submit the tax return treating the it as a second home (i.e., only deducting real estate taxes) . Bruce