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When to claim depreciation on a rental
Dear Tax Talk:
If I sell rental property, will the depreciation
claimed in prior years as deductions have to be taxed? If so, is
all depreciation claimed or just some of it? Will it be treated
as income in the tax year that the property is sold?
Mike
Dear Mike:
Continuing with the recent depreciation theme, what Uncle
Sam gives he also takes back.
As I explained
to another reader with rental property, you get to claim depreciation
write-offs on rental property even though it usually appreciates
in value.
However, when it comes time to sell the property,
you'll pick up as additional income the depreciation deductions
you previously claimed provided that you have gained that much.
But there's a silver lining, you get a favorable tax
rate on the prior depreciation deductions you claimed on rental
real estate. Since the depreciation deductions are claimed at the
tax rate that applies to ordinary income, the special treatment
on disposition is a really nice tax break.
For example, depreciation may have saved you tax at
40 percent when you claimed the deduction, but the maximum tax rate
when you sell is 25 percent.
For example, if you have claimed $25,000 in depreciation
on a house with an original cost of $100,000 that you sell for $150,000,
your gain is $75,000, of which $25,000 is recapture of depreciation.
You'll pay tax on the $25,000 at 25 percent and pay 20 percent capital
gains tax on the $50,000 gain above your original cost.
-- Posted: April 1, 2003
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