Depreciation Recapture with low capital gain.

[John Alosio]

Hello BP family.

I'm here today with a tax question relating to the sale of a rental property.

I have a property under contract right now, my sale price is right around my cost basis.

For depreciation recapture, I understand that if you sell at a net loss, recapture is forgiven. But in my case there would be a slight overage. Just not enough to cover what is owed.

Hypothetically, lets say that I would be on the hook to repay the IRS $5,000 in recapture. However the net gain is only $1,000 beyond the cost basis. What would happen at that point?

Would the IRS then take everything above cost basis until recapture is satisfied?

Thanks in advance for your time.

Cheers

[Michael Plaks]

@John Alosio

You bought a property for $100k

You had $5k of depreciation which was a deduction

You're selling it for $101k

You have two tax events:

1. Your $5k depreciation is "recaptured" which is nothing but a reversal. You had a $5k deduction earlier, and you have a $5k income now. It's a round trip: nothing gained, nothing lost. 

2. You have a $1k capital gain, taxable.

This was oversimplification, but should help you make sense of the math.