Cost segregation recapture on a teardown property

[Niklas Zhu]

First, appreciate all the replies to this topic. The reason I post this here is because I got totally different answers from two CPAs

Here is the story:

I bought the house as investment property and run it as STR for the last two years. And right now, I am going to tear it down in 2025 and build a new house as my primary home. My question is do I have to recapture all the depreciation for tax in 2025?

Thank you

[Ben Trageser]

Based on your situation, you will likely need to recapture the depreciation when you convert the property from a rental (STR) to your primary residence in 2025.

Depreciation recapture is triggered when you dispose of or change the use of a depreciable asset. In your case, changing the property from a rental to your primary residence constitutes a change in use.

The depreciation recapture will be calculated based on the fair market value of the building at the time of conversion, not including the land value.

Since you're tearing down the existing structure, the entire amount of depreciation taken over the past two years will likely be recaptured, as the building's value at conversion will effectively be zero.

The recaptured amount will be taxed as ordinary income, up to a maximum rate of 25% for residential rental property (Section 1250 property). You'll need to report this recapture on IRS Form 4797 in your 2025 tax return.