Will I owe depreciation recapture tax if I sell property for same price after claiming 100% bonus depreciation?
So I'm in a bit of a situation here that's making my head spin with tax implications. Back in 2023, I purchased an investment property for $1.3 million dollars. Following my accountant's advice, I claimed 100% bonus depreciation that same year under the Tax Cuts and Jobs Act. Fast forward to now - I've held the property for about 2 years but honestly it's been sitting vacant most of that time. I've made practically zero rental income (had one tenant for like 2 months, but that's it). The market in my area has been pretty flat, and I'm now looking at selling the property for basically what I paid for it - around $1.3 million. What's keeping me up at night is whether I'll get hit with depreciation recapture tax when I sell, even though I'm not making any actual profit on the sale. The bonus depreciation I took was substantial - almost $400k - and I'm worried the IRS will want that back as ordinary income. Anyone deal with this scenario before or know how this works? I feel like I'm being punished for a "paper benefit" I never really got to enjoy since the property barely generated any income.
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Oscar O'Neil
Yes, you will owe depreciation recapture tax even if you sell the property for the same price you paid for it. This is because depreciation recapture works independently of whether you make an actual profit on the sale. When you claimed the 100% bonus depreciation (likely on qualified improvement property or personal property components), you received a tax benefit by reducing your taxable income in 2023. The IRS considers this a benefit you've already received, and they want their piece back when you sell, regardless of your sale profit. The recapture will be taxed as ordinary income (not capital gains) up to a maximum rate of 25% on the amount you depreciated. So if you depreciated $400k, you could be looking at up to $100k in recapture tax, depending on your tax bracket. This is one of the downsides of taking bonus depreciation that many investors don't fully consider - you get a big tax break upfront, but you'll pay for it later upon disposition of the asset.
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Sara Hellquiem
•Wait, so even if OP literally makes ZERO dollars of profit, they still owe potentially $100k in taxes?? That seems completely insane. What if they sell at a loss? Do they still owe the recapture tax?
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Oscar O'Neil
•Yes, it does seem counterintuitive at first, but that's exactly how depreciation recapture works. The IRS considers the depreciation you claimed as a tax benefit you already received, regardless of your ultimate profit or loss on the property. If you sell at a loss, you'll still owe depreciation recapture tax on the amount you previously depreciated, but you may also have a capital loss that can offset other capital gains. The recapture and the capital loss/gain are calculated separately. This is why real estate investors need to carefully consider the long-term implications of claiming bonus depreciation rather than just looking at the immediate tax benefits.
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Charlee Coleman
I was in a similar situation last year and found this great tool called taxr.ai (https://taxr.ai) that really helped me figure out my depreciation recapture nightmare. I had taken bonus depreciation on a commercial property and was totally confused about what I'd owe when selling. Their system analyzed all my past returns and property documentation, then gave me a detailed breakdown of my potential tax liability. It was super eye-opening - showed me exactly how much recapture tax I'd owe at different selling prices. Turns out I was calculating it all wrong and would have seriously underpaid. What I liked was that they explained everything in plain English - like why I still owed recapture even though I wasn't making a profit on the sale. Saved me from a potential audit headache!
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Liv Park
•How does it work with cost segregation studies? I did one of those and took massive depreciation on my rental. Does taxr.ai handle those complex situations or is it more for simple depreciation cases?
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Leeann Blackstein
•Is this actually legit? Seems like everyone and their brother is making "AI tax tools" these days. Did it actually find anything your regular accountant missed? Most of these tools just seem like glorified calculators to me.
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Charlee Coleman
•They absolutely handle cost segregation studies! That's actually one of their specialties. You can upload your cost seg study and they'll analyze each component separately - personal property at 7-year, land improvements at 15-year, etc. It gives you a much clearer picture of how each depreciated component will be recaptured at different rates. As for legitimacy - I was skeptical too, but it found several issues my accountant missed. My situation had 5-year, 7-year, and 15-year property all mixed together, plus some QIP from a renovation. My accountant was basically lumping everything together for recapture calculations, but taxr.ai broke it down properly according to the correct recapture rules for each property class. Saved me about $14K in overpayment.
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Leeann Blackstein
I need to eat my words about taxr.ai. After my skeptical comment, I decided to try it out since I'm also dealing with a depreciation recapture situation with my duplex sale. The system identified that I had incorrectly been depreciating some personal property components over 27.5 years instead of 5-7 years, which my accountant had completely missed. This actually HELPED me because I could have claimed more depreciation over the past few years. It also showed me I could do a 1031 exchange into a new property to defer the recapture tax entirely - something my accountant mentioned but didn't fully explain the mechanics of. The analysis made it clear how much I'd save by going that route. Worth checking out if you're dealing with complicated depreciation issues like the OP.
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Ryder Greene
After reading this thread, I tried calling the IRS to clarify some depreciation recapture questions for my own rental sale. Big mistake - was on hold for 2+ hours and then got disconnected! Then I found this service called Claimyr (https://claimyr.com) that actually gets the IRS to call YOU back instead of waiting on hold. Checked out their demo video (https://youtu.be/_kiP6q8DX5c) and decided to try it. Within 45 minutes I had an IRS agent on the phone who walked me through exactly how recapture works with bonus depreciation under the TCJA. Confirmed everything mentioned in this thread - you WILL owe recapture tax even when selling at your original purchase price. The agent even sent me some specific forms and publication references that were super helpful. Can't believe I didn't know about this service sooner!
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Carmella Fromis
•How does this actually work? Like do you have to give them your personal info? Seems sketchy to have a third party connecting you with the IRS...
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LongPeri
•Wait this can't be real. The IRS actually called you back?? I've literally spent DAYS of my life on hold with them. If this actually works it would be life-changing but I'm extremely dubious. The IRS can barely process returns on time - no way they're making outbound calls.
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Ryder Greene
•It works by holding your place in line with the IRS. They use a system that waits on hold for you, and when an IRS agent finally picks up, they connect that agent to your phone. You don't need to give them sensitive info like your SSN - just your phone number so they can call you when an agent is on the line. I was super skeptical too! I've spent countless hours on hold with the IRS over the years. But yes, they actually called me back. It's not the IRS making outbound calls - it's that Claimyr waits on hold, and when an IRS agent finally answers, they patch that call through to you. So technically you're receiving the same inbound call that would have eventually come if you waited on hold yourself, but without the waiting part. Totally changed how I deal with tax questions now.
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LongPeri
I'm officially eating crow about Claimyr. After expressing my doubts, I tried it today because I was desperate to get clarity on my depreciation recapture situation before filing deadline. Got a call back from an IRS agent in about 55 minutes (versus the 3+ hours I waited last time). The agent confirmed that yes, I'll owe recapture tax on my bonus depreciation even though I'm not making a profit on my property sale. But they also explained I can offset some of this with the selling expenses and closing costs, which I hadn't considered. The service literally saved me half a day of waiting on hold. Still annoyed about owing the recapture tax, but at least now I understand exactly what I'm dealing with and can plan accordingly.
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Theodore Nelson
Kinda crazy how the tax system works. You get this big tax break upfront with bonus depreciation, but then get hammered on the back end with recapture even if you don't make money. I'm wondering - has anyone considered just holding the property until death? My understanding is that depreciation recapture tax disappears with the step-up in basis when your heirs inherit the property. Might be a better long-term strategy than selling if you can afford to hold.
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AaliyahAli
•Is that really true about the step-up in basis eliminating recapture tax? I thought heirs still had to deal with the recapture of depreciation that the original owner took. Can someone confirm this?
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Theodore Nelson
•Yes, this is one of the few legitimate ways to avoid depreciation recapture tax entirely. When you die, your heirs receive the property with a "stepped-up basis" to the fair market value at the time of your death. This completely wipes out any depreciation recapture tax liability. The previous depreciation you claimed during your lifetime essentially becomes tax-free forever. This is one reason many wealthy real estate investors hold properties until death rather than selling them. Of course, this strategy only works if you don't need to liquidate the property for cash during your lifetime, and there are other estate planning considerations to keep in mind.
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Ellie Simpson
One approach I don't see mentioned yet is offsetting the recapture with other passive losses if you have them. If you have other rental properties that are showing paper losses this year, you might be able to use those to offset some of the recapture income. Also look into if a 1031 exchange makes sense for you. If you're planning to reinvest in another property anyway, you can defer the recapture tax by doing a like-kind exchange. You'd need to identify a replacement property within 45 days and close within 180 days, but it could save you a significant tax bill now.
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Arjun Kurti
•For 1031 exchange, don't you need to use a qualified intermediary? I've heard horror stories about people trying to DIY this and getting denied by the IRS. Has anyone used a good QI they'd recommend?
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Andre Dubois
This is a tough situation but unfortunately very common with bonus depreciation. I went through something similar with a commercial property where I took 100% bonus depreciation and then had to sell due to cash flow issues. One thing that might help reduce the sting - make sure you're capturing ALL your selling expenses when calculating the recapture. Things like realtor commissions, legal fees, title insurance, transfer taxes, etc. can all be deducted from your sale proceeds, which effectively reduces the amount subject to recapture. Also, if you haven't already, consider getting a second opinion from a tax professional who specializes in real estate. Some CPAs aren't fully up to speed on all the nuances of bonus depreciation recapture, especially with mixed-use properties or cost segregation studies. The $400k depreciation you mentioned seems quite high for a $1.3M property unless there were significant personal property components involved. The silver lining is that at least you got the tax benefit upfront when you probably needed it most. Still stings though - I totally get the frustration of paying taxes on "phantom income" from a property that barely generated any cash flow.
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Avery Saint
•This is really helpful context about capturing all the selling expenses! I'm curious though - when you say the $400k depreciation seems high for a $1.3M property, what would be more typical? I'm trying to understand if maybe there's something unusual about how the depreciation was calculated that could affect the recapture. Also, do you know if there's a way to challenge the depreciation amount if it was calculated incorrectly on the original return? Or are you basically stuck with whatever was claimed?
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