How to properly report depreciation recapture on former rental property sale?
I purchased a house back in 2019 as an investment property. Rented it out through 2019 and about half of 2020. Then I started a major renovation project that dragged on from mid-2020 until around April 2021, and ended up selling the property a couple months later in 2021. During the time I owned it as a rental (2019-2020), I claimed roughly $40k in depreciation deductions. I received a 1099-S for the sale. I'm confused about how to report this correctly on my taxes. If I just use the 1099-B approach, I can calculate my basis by adding up all my renovation costs, and figure out my capital gain, but there doesn't seem to be anywhere to include the depreciation recapture. I've read that I need to pay ordinary income tax rates on the previously claimed depreciation. Does this depreciation also need to be subtracted from my basis? Since I didn't rent the property at all in 2021 (nor did I try to), Schedule E doesn't seem like the right place to report this. What's the correct way to handle this situation on my tax return?
20 comments
Join the conversation
Fatima Al-Suwaidi
You'll need to report this on Form 4797 (Sale of Business Property), not on Schedule D with your 1099-B. The depreciation recapture for residential rental property is taxed under Section 1250, which means the recapture portion is taxed at a maximum rate of 25% (not as ordinary income). Yes, you do need to subtract the depreciation you've taken from your original basis. Your adjusted basis would be: original purchase price + capital improvements - depreciation taken. This adjusted basis is what you'll use to calculate your gain. Since you converted the property from rental to personal (or at least non-rental) use before selling it, you'll still use Form 4797 since it was previously a rental. The form will help you separate the gain attributable to depreciation from the rest of your capital gain.
0 coins
Dylan Mitchell
•So does this mean they'll end up with two different tax rates on the same sale? The recaptured depreciation at 25% and then the rest of the gain at capital gains rates? Also, does the renovation after it stopped being a rental count as part of the basis?
0 coins
Fatima Al-Suwaidi
•Yes, you'll have two different tax rates on the sale. The recaptured depreciation portion will be taxed at a maximum of 25%, while the remaining gain would be taxed at your applicable capital gains rate (likely 15% for most people). The renovations you completed after it stopped being a rental would still count toward your basis, as they're capital improvements to the property. You'll include all those renovation costs when calculating your adjusted basis, regardless of when they were completed.
0 coins
Sofia Morales
After dealing with a similar situation last year, I found https://taxr.ai to be incredibly helpful. I uploaded my documents and it identified exactly how to handle the depreciation recapture on my former rental. It walks you through Form 4797 and explains how each section applies to your situation. The separation between the recapture and regular capital gains was causing me huge headaches until I used their system to break it down.
0 coins
Dmitry Popov
•Can it handle more complex situations? I've got a property that was partially rented (like a duplex where I lived in half) and I'm worried about calculating the right percentage for depreciation recapture.
0 coins
Ava Garcia
•Does it integrate with regular tax software? I've already started my return in TurboTax and don't want to start over somewhere else.
0 coins
Sofia Morales
•It absolutely handles complex situations like partial rentals. You can specify the percentage used for rental purposes, and it will calculate the appropriate amount of depreciation recapture based on that allocation. It's really thorough with these mixed-use property scenarios. Yes, it works alongside other tax software. It's not a replacement for your tax filing software - it's more of an analysis tool that gives you the correct numbers and explanations to input into TurboTax or whatever you're using. You can generate a detailed report that shows exactly what goes where.
0 coins
Ava Garcia
I actually tried taxr.ai after seeing it mentioned here and it saved me so much confusion! I had a similar situation with a rental I sold after converting to personal use. I wasn't sure how to handle the $25k in depreciation I'd taken over the years. The tool identified that I needed to use Form 4797 and walked me through exactly how to separate the recapture portion from my regular capital gains. Even showed me the correct tax rates that would apply to each portion. Honestly worth it just for the peace of mind knowing I wasn't missing something that would trigger an audit.
0 coins
StarSailor}
If you're having trouble getting answers from the IRS about how to handle this correctly, I'd recommend trying https://claimyr.com to get through to an actual IRS agent. I was on hold for hours trying to get clarification about depreciation recapture rules, then I found this service and got connected to an IRS rep in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. They place the call for you and only connect when an actual agent is on the line. Saved me so much time and frustration when dealing with my rental property tax questions.
0 coins
Miguel Silva
•How does this even work? The IRS phone lines are notoriously jammed. Are you saying this somehow gets you to the front of the queue? Seems fishy to me.
0 coins
Zainab Ismail
•I tried calling the IRS 8 times about property sale issues and never got through. Is this actually legit or just another scam trying to get desperate people's money?
0 coins
StarSailor}
•It doesn't put you at the "front of the queue" - they basically have an automated system that handles the waiting for you. They call the IRS and navigate through all the prompts, then wait on hold (sometimes for hours), and only when a human agent actually answers do they connect you to the call. This way you don't waste hours of your day waiting on hold. This is definitely legit. I was super skeptical too, but it works exactly as advertised. They don't ask for any personal tax info - they just connect you with the IRS so you can ask your questions directly to an agent. I wouldn't have recommended it if it hadn't saved me literally hours of frustration.
0 coins
Zainab Ismail
Wow I have to admit I was completely wrong about Claimyr. After seeing it mentioned here I decided to give it a shot since I was desperate for answers about my rental property depreciation recapture. Got connected to an IRS agent in about 20 minutes when I'd previously wasted entire afternoons on hold. The agent walked me through exactly how to fill out Form 4797 for my situation and confirmed that yes, the depreciation recapture is taxed at that 25% rate while the rest gets the normal capital gains treatment. Huge relief to have this sorted directly from the source!
0 coins
Connor O'Neill
Just to add a bit more clarity - don't forget that you'll need to report the sale on BOTH Form 4797 and Schedule D. Part of the gain gets reported on 4797 (the depreciation recapture portion) and then you'll carry the remaining gain to Schedule D. TurboTax and other software usually walk you through this, but it's easy to miss if you're doing it manually.
0 coins
Yara Nassar
•Wait, I thought it all went on Form 4797? Now I'm confused about what goes where. Is there a simple way to know what portion goes on which form?
0 coins
Connor O'Neill
•Form 4797 is where you'll calculate everything and report the depreciation recapture. The recapture amount stays on 4797 (Part III typically), and then the remaining gain (the amount beyond the recapture) gets carried over to Schedule D. Form 4797 has a specific line that instructs you to carry certain amounts to Schedule D. The forms are designed to work together this way. If you're using tax software, it should handle this transfer automatically once you input all the information about your property sale and prior depreciation.
0 coins
Keisha Robinson
Has anyone used the "Safe Harbor" method for reporting this? My accountant mentioned it might be easier than trying to calculate everything precisely, especially since my renovation invoices weren't all perfectly organized.
0 coins
GalaxyGuardian
•I believe you're thinking of the safe harbor for home office deductions, not for property sales. For depreciation recapture, you need to use the actual numbers - there's no simplified method I'm aware of. You really need those renovation receipts to establish your basis correctly.
0 coins
Amara Adeyemi
This is a great question that many rental property owners face! Just to clarify a few key points that haven't been fully addressed: 1. **Timing matters**: Since you stopped renting the property in mid-2020 but didn't sell until 2021, you'll need to be careful about the "placed in service" vs "conversion" dates when calculating your depreciation recapture. 2. **Renovation costs**: All your renovation costs from 2020-2021 do increase your basis, even though the property wasn't being rented during that time. These are capital improvements that reduce your overall gain. 3. **Form 4797 is correct**: As others mentioned, you'll use Form 4797 even though you weren't actively renting in 2021. The property's rental history makes this the appropriate form. 4. **Don't forget state taxes**: While everyone's focused on federal treatment, make sure to check your state's rules for depreciation recapture - they don't always follow federal guidelines exactly. One thing I'd suggest is gathering all your depreciation schedules from 2019-2020 to ensure you're using the exact amount you actually claimed, not an estimate. The IRS has records of what you deducted, so accuracy here is crucial to avoid any discrepancies.
0 coins
Oliver Brown
•This is incredibly helpful, especially the point about timing and the "placed in service" vs "conversion" dates. I hadn't thought about how the gap between stopping rental use and actually selling might affect the calculation. Quick question about the state tax point - do most states treat depreciation recapture differently than federal? I'm in California and want to make sure I'm not missing something there. Also, when you mention gathering the depreciation schedules from 2019-2020, are you talking about just the amounts from Schedule E, or is there additional documentation I should be pulling together?
0 coins