Cost seg depreciation recapture model

[William C.]

Can anyone quickly share a math model of a the depreciation recapture scenario below? Thanks in advance for considering.

Purchased a home for $700k

Completed $25k in renovations

Completed a cost seg study (80% bonus) that resulted in $80k in passive losses for that tax year

What if we now sold that property for $800k. Home would have been held for 5 years total. We are not eligible for capital gains sheltering under the 2 out of the last 5 years rule. We have a combined personal tax rate of 30%. What would a taxation model look like in this scenario? We are over planners and want to know what type of restraints we have put on our exit routes. Ideally we hold forever (cash flow positive) or we 1031 to another property.

Thanks in advance. Let me know what other details are needed to answer fully.

[William C.]

Quote from @Account Closed:

Hey Nathaniel, 

In this scenario, when selling the property for $800k, depreciation recapture would be a key consideration. The cost basis is the $700k purchase price plus $25k in renovations, totaling $725k. The cost segregation study generated $80k in passive losses, meaning a portion of that would be recaptured as ordinary income (at a 25% federal rate). The difference between the sales price ($800k) and the adjusted cost basis ($725k minus $80k of accelerated depreciation) is $155k. The $80k of depreciation recapture will be taxed at 25%, and the remaining $75k capital gain will be taxed at the capital gains rate (likely 15-20%). Your combined personal tax rate of 30% could apply to state and federal taxes depending on jurisdiction. A 1031 exchange could defer both capital gains and depreciation recapture taxes if you reinvest in another like-kind property. Depending on if this is your primary residence or not can alter the strategy but that's the gist 

 This is great (and fast!). Thanks for taking the time. Not a personal residence for us. We like having a full handle on all scenarios. #1 we aim to buy and hold forever. #2 we like the future potential for 1031. #3 would be selling the property and taking the tax hit. This could happen in an emergency scenario so it is good to know what the numbers look like.

How do you account for depreciation from the cost seg that was offset by rental income cash flow over time?

In the event of a sale, are you able to subtract realtor fees and other sale fees from the net gain of the sale?