Depreciation Recapture Tax: What You Need to Know

If you own a rental property, there's a good chance you're familiar with rental property tax Denver and the concept of depreciation. Essentially, depreciation allows you to write off the cost of your property over time. However, what you may not know is that when you sell your property, you may be subject to a depreciation recapture tax. Here's what you need to know about this tax and how it can impact your bottom line.

What is Depreciation Recapture Tax?

Depreciation recapture tax is a tax on the profit you make when you sell an asset that has depreciated in value over time. In the context of rental properties, this usually refers to the sale of a property that has been depreciated over the course of several years.

How is Depreciation Recapture Tax Calculated?

The amount of tax you owe on the sale of your rental property will depend on a number of factors, including the profit you make on the sale, the depreciation deductions you've taken over the years, and your marginal tax rate.

To calculate your depreciation recapture tax, you'll first need to calculate your capital gain—or profit—on the sale of your property. To do this, simply subtract the purchase price from the sale price. For example, if you purchased a property for $200,000 and sold it for $250,000, your capital gain would be $50,000.

Once you've calculated your capital gain, you'll need to subtract any depreciation deductions you've taken over the years. Let's say you've been claiming $5,000 in depreciation deductions each year for a total of four years. In this case, your taxable gain would be $40,000 ($50,000 - $10,000).

Finally, you'll need to multiply your taxable gain by your marginal tax rate to calculate your depreciation recapture tax liability. If you're in the 25% marginal tax bracket, for example, your depreciation recapture tax liability would be $10,000 ($40,000 x 0.25).

Wrap Up!

As a taxpayer, it's important to be aware of all the taxes that may apply to you—including depreciation recapture tax. While this tax can seem confusing at first glance, it's actually relatively easy to calculate.

Just remember to subtract any depreciation deductions you've taken over the years from your capital gain before multiplying by your marginal tax rate. Doing so will help ensure that you don't end up owing more taxes than necessary come April 15th!