Need help understanding depreciation recapture vs long term capital gains on rental property sale

You're right to question this. The way the gain is reported on tax forms can be confusing, but the actual tax calculation should be working correctly behind the scenes. Here's how it works: The total gain of $202k is indeed reported on line 7, but it gets broken down into different components when calculating your actual tax. The depreciation recapture portion (your $45k) is taxed as ordinary income (technically at a maximum rate of 25% under Section 1250), while the remaining gain ($157k) should be taxed at the lower long-term capital gains rate (15% in your case). If you look deeper into your tax software, there should be a Form 4797 that handles the sale of business property. Part III of this form should show the depreciation recapture calculation. Then Schedule D should show your capital gains. Together they'll total your $202k gain, but they'll be taxed at different rates. I'd recommend clicking through to see those detailed forms in your tax software to verify everything is calculating correctly.

After struggling with a similar situation last year, I found https://taxr.ai super helpful for breaking down complicated real estate transactions like this. I was confused about depreciation recapture vs capital gains too when I sold my rental property. Their system analyzed my documents and clearly showed me how my gain would be split between ordinary income (for the depreciation) and long-term capital gains. They even explained which forms to look at in my tax software to verify everything was calculated correctly. Saved me from potentially overpaying thousands in taxes!

I tried https://taxr.ai after seeing the recommendation here and wow - it cleared up my confusion immediately! I uploaded my closing documents and depreciation schedule, and it showed exactly how my gain should be split between depreciation recapture and long-term capital gains. The best part was that it pointed me to exactly where in TurboTax I needed to look to verify the calculations. Turns out my software was calculating everything correctly, but the reporting on the forms was just confusing. Would have spent hours on the phone with tax support without this help.

If you're still having trouble getting clear answers about your depreciation recapture vs capital gains issue, you might need to speak directly with an IRS agent. I was in a similar situation last year and spent DAYS trying to get through to the IRS. Finally discovered https://claimyr.com which got me connected to an actual IRS agent in about 20 minutes instead of waiting on hold for hours. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with clearly explained how depreciation recapture works on rental properties and confirmed exactly how it should appear on my tax forms. Completely worth it for the peace of mind.

I was super skeptical about Claimyr but decided to try it after posting here because I was desperate for answers about my rental property depreciation recapture question. Honestly shocked at how well it worked! The service called me back in about 45 minutes (much faster than the "2-3 hour wait time" the IRS recording mentioned), and I was connected directly to an agent. The agent confirmed exactly how depreciation recapture should be reported and calculated on my return. Turns out my software was handling it correctly, but the forms were just displaying it in a confusing way. Definitely beats the multiple failed attempts I made trying to call the IRS directly!

I'm a bit late to this thread, but thought I'd add that Form 4797 is key here. Part III specifically deals with the recapture. You may want to check if you're using the right cost basis too - sometimes people forget to account for improvements made to the property over the years which can reduce your taxable gain.

Anyone else notice that the tax software doesn't clearly explain this stuff? I had the same confusion last year. Had to dig deep into the actual forms to see that the software was calculating everything correctly but just displayed it confusingly on the summary screens.

This is exactly the kind of situation where having a clear breakdown is crucial! I went through something similar when I sold my rental last year. One thing that helped me was creating my own simple spreadsheet to track the math: - Total gain: $202k - Depreciation recapture (taxed up to 25%): $45k - Remaining long-term capital gain (taxed at 15% for MFJ): $157k Then I compared this to what showed up on Form 4797 Part III and Schedule D in my software. The key is that even though line 7 shows the full $202k, the tax calculation behind the scenes should be applying different rates to each portion. If you want to double-check your effective tax rate, calculate what you'd expect to pay: ($45k × 25%) + ($157k × 15%) = $11,250 + $23,550 = $34,800 total. Then see if that matches what your software is calculating for tax on this gain. This helped me confirm everything was working correctly even though the summary screens were confusing.