Depreciation Recapture

[Jagadeesh Chandramohan]

When you sell a rental property, depreciation recapture is taxed at higher rate.

My question is do you owe the tax on depreciation recapture if you actually had no tax benefit from it during the years you were renting if?

Example 

You bought a property 5 years ago for $100,000. Building value was 80,000. Annual depreciation is $2909. Accumulated depreciation is $14,545. After figuring your rental income and other deductible expenses in connection with the property, you had a tax loss each year.

However, your annual income from other sources ( salary, interest, investments etc.) was well over the IRS threshold, so the rental property tax losses had no impact on your actual tax liability for those 5 years.

Now you sell the property for $150,000. The $50,000 capital gain is treated under long term capital gain rules.

What I am not clear is what happens with the $14,545 in accumulated depreciation. Most tax forums say that is taxed at 25%.

What they don't clarify is does this tax apply even if you actually had no tax benefit from it during the period you rented it out because of your other income? Or do they recapture only any real tax benefit you had?

Chandru