Carry forward losses and depreciation recapture tax - Rental

[Lan Bak]

Can you offset depr. recapture with carry forward losses on sale of a Rental property for a Non Real estate professional ?

Example (putting non depr. land value aside) :

Purchase price - $100,000

Selling Price - $125,000

Allowed Depr/year - $3636

Property is sold after 10 years with a passive carry forward loss of $30000

Capital gain based on adjusted basis - $61360 (125000 - 63640)

Actual capital gain/loss is -$5000 (61360 - 36360 - 30000)  [No capital gain tax I assume]

Depr recapture tax is owed on $36360 or on $31360 (36360 - 5000) ?

or in other words, can the carry forward loss be fully used or the $5000 passive loss needs to be carried over ?

Thanks in advance !

[Tony Kim]

Quote from @Lan Bak:

Can you offset depr. recapture with carry forward losses on sale of a Rental property for a Non Real estate professional ?

Example (putting non depr. land value aside) :

Purchase price - $100,000

Selling Price - $125,000

Allowed Depr/year - $3636

Property is sold after 10 years with a passive carry forward loss of $30000

Capital gain based on adjusted basis - $61360 (125000 - 63640)

Actual capital gain/loss is -$5000 (61360 - 36360 - 30000)  [No capital gain tax I assume]

Depr recapture tax is owed on $36360 or on $31360 (36360 - 5000) ?

or in other words, can the carry forward loss be fully used or the $5000 passive loss needs to be carried over ?

Thanks in advance !

Yes, PALs carried forward from prior years can be used to offset recapture...as recapture is just a form of capital gains. The real question is which tranche of capital gains you will be offsetting. I.e., will the 30K be applied entirely against your recapture balance of 36,360?  Or will it first be applied against your 15% LTCG? I believe it will be applied against the recapture first, so you will be left with 6,360 of recapture and also liable for 25K in standard LTCG.