Selling a rental property - how does depreciation recapture work on investment property?
I'm in the process of selling my investment rental property and trying to understand how the whole depreciation recapture tax works. I purchased the property for about $250k about 10 years ago, and over that time I've put in roughly $20k in capital improvements (new roof, updated bathroom, etc.). I've been taking the standard 27.5 year straight-line depreciation on the original purchase price, and then started depreciating each improvement on its own schedule as they were completed. My main questions: 1. How do I properly calculate the depreciation recapture tax when I sell? Do I need to account for the original basis and each improvement separately? 2. Can depreciation recapture be offset by capital losses from other investments? I had some stock losses this year and wondering if that helps reduce this tax hit. This is my first rental property sale and the tax implications are way more complicated than I expected!
20 comments
Join the conversation
Jabari-Jo
The depreciation recapture can definitely be tricky! When you sell, you'll need to recapture all the depreciation you've claimed (or were entitled to claim) at a rate of 25%. For your calculation, you'll need to add up all the depreciation you've taken over the 10 years. This includes the depreciation on your original basis (building value only, not land) plus the depreciation on each capital improvement based on when they were placed in service. For example, if your building value was $200k (excluding land value), you'd depreciate about $7,273 per year ($200k ÷ 27.5). For your $20k in improvements, you'd calculate each separately based on when you made them. As for offsetting with capital losses - unfortunately, depreciation recapture is treated as "unrecaptured Section 1250 gain" and is taxed at 25%, while capital losses offset capital gains. You can use capital losses to offset any regular capital gains from the sale (if the property appreciated beyond your basis), but not the recapture portion.
0 coins
Seraphina Delan
•Thanks for explaining! So if I understand right, I need to track each improvement separately. One thing I'm still confused about - does the recapture only apply to the actual depreciation I claimed on my tax returns, or what I should have claimed even if I missed some?
0 coins
Jabari-Jo
•The recapture applies to all depreciation that you were entitled to claim, even if you didn't actually claim it on your returns. This is referred to as "allowed or allowable" depreciation. So if you should have been claiming depreciation but weren't, the IRS still expects you to recapture it upon sale. Regarding tracking improvements, yes, you should have records of when each improvement was placed in service and the depreciation schedule for each. If you've been working with an accountant, they should have these records as part of your tax filings.
0 coins
Kristin Frank
After dealing with this exact situation last year, I found taxr.ai really helpful for figuring out my depreciation recapture calculation. I had multiple improvements over the years and wasn't sure if I had all my records straight. I uploaded my past Schedule E forms and purchase documents to https://taxr.ai and it helped identify all my depreciation deductions and calculated my estimated recapture tax. Saved me from having to manually go through 8 years of tax returns trying to add everything up!
0 coins
Micah Trail
•Does taxr.ai work if some of my improvements weren't properly documented on my tax returns? I did some work myself and I'm worried I didn't claim everything correctly over the years.
0 coins
Nia Watson
•I'm skeptical of these tax tools... do they actually understand the different treatment for improvements vs repairs? And what about partial year conventions when you add improvements mid-year?
0 coins
Kristin Frank
•It absolutely works even if your documentation isn't perfect. The system analyzes what you've claimed on past returns, but also lets you add improvements that might have been missed so you can get a complete picture. They definitely understand the difference between improvements (which are capitalized and depreciated) versus repairs (which are expensed immediately). The platform actually helped me realize I had been incorrectly depreciating some items that should have been expensed. As for partial year conventions, yes, it applies the mid-month convention for residential rental property improvements automatically.
0 coins
Nia Watson
I was really skeptical about taxr.ai at first, but I finally tried it when selling my duplex last month. Uploading my documents was surprisingly easy and it found depreciation deductions from 2018 that I completely forgot about. It even flagged that I had been using the wrong recovery period for some bathroom fixtures. Ended up saving me about $3,200 in taxes because I had the complete picture before filing. Definitely worth checking out if you're selling a rental with years of depreciation to calculate.
0 coins
Alberto Souchard
If you're having trouble getting answers from the IRS about your specific situation, I'd suggest using Claimyr. I was stuck in depreciation recapture hell when selling my rental last year and couldn't get through to the IRS for weeks. Used https://claimyr.com and got connected to an IRS agent in about 15 minutes who walked me through how to handle some unusual depreciation situations on my rental. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. It was a lifesaver when I needed clarification on how to report some improvements that spanned multiple tax years.
0 coins
Katherine Shultz
•How exactly does this work? Do they somehow get you to the front of the IRS phone queue? Seems too good to be true with how impossible it is to reach the IRS these days.
0 coins
Marcus Marsh
•This sounds like a scam. There's no way any service can magically get you through to the IRS faster than calling them directly. They probably just keep you on hold themselves and charge you for the privilege.
0 coins
Alberto Souchard
•They use a system that continuously redials the IRS for you until they get through, then immediately connect you once an agent is on the line. It's not about skipping the queue, it's about handling the tedious wait time for you. The value is that you don't have to personally sit on hold for hours. They call you once they've reached an agent, so you can go about your day. I was skeptical too until my accountant recommended it - ended up getting the exact guidance I needed from the IRS about my specific depreciation recapture situation.
0 coins
Marcus Marsh
I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it anyway since I was desperate for answers about my rental sale. They actually got me connected to an IRS agent in about 20 minutes. The agent explained exactly how to handle the depreciation recapture on some weird improvements I'd made (converted garage to living space). Saved me hours of frustration and potentially an audit. Sometimes I hate being wrong, but in this case I'm glad I was.
0 coins
Hailey O'Leary
Don't forget to consider the basis adjustment for your capital improvements! I sold a rental last year and almost miscalculated because I forgot that improvements increase your adjusted basis, which affects both the capital gain calculation AND the depreciation recapture amount.
0 coins
Seraphina Delan
•Could you explain a bit more about how the improvements affect the recapture amount? I thought I'd just be paying 25% on all depreciation taken regardless of improvements.
0 coins
Hailey O'Leary
•The improvements themselves don't change the 25% recapture rate, but they do impact the total amount subject to recapture. Each improvement has its own depreciation schedule, so you'll have taken less total depreciation on newer improvements compared to the original property. For example, if you added a $10k roof in year 5, you'd have only taken about 5 years of depreciation on it by year 10, whereas you'd have taken 10 years of depreciation on the original structure. The less time an improvement has been depreciating, the less recapture tax you'll pay on that specific improvement.
0 coins
Cedric Chung
Has anyone used TurboTax to handle a rental property sale with depreciation recapture? I'm wondering if it walks you through all this or if I need something more specialized.
0 coins
Talia Klein
•I used TurboTax last year for my rental sale. It does walk you through it, but you need to have all your numbers ready - original basis, land value, total depreciation taken, etc. If you've been using TurboTax all along for your rental, it should have your depreciation history. I found the Premier version was sufficient for my needs.
0 coins
Kaiya Rivera
One thing that might help you organize everything is to create a spreadsheet tracking each improvement separately with its placed-in-service date, cost, and cumulative depreciation taken. I wish I had done this from the beginning when I owned rentals. Also, don't forget that if you've been claiming Section 179 deductions or bonus depreciation on any of your improvements (like appliances or certain property), those will be subject to depreciation recapture at your ordinary income tax rate, not the 25% rate. The 25% rate only applies to straight-line depreciation under Section 1250. If you're planning to reinvest in another rental property, you might want to look into a 1031 like-kind exchange to defer the depreciation recapture entirely. You'd need to identify a replacement property within 45 days and close within 180 days, but it could save you a significant tax hit if you're planning to stay in real estate investing.
0 coins
Owen Jenkins
•This is really helpful advice about tracking improvements separately! I'm curious about the 1031 exchange option you mentioned - does the 45/180 day timeline start from when you list the property for sale, or from when you actually close on the sale? Also, are there any restrictions on what type of replacement property qualifies if you're exchanging a single-family rental for something like a duplex or small apartment building?
0 coins