Depreciation Recapture on Land Sale Contract

[Robert McEachern]

Hi All:

I am buying a property on a land sale contract.  The seller will retain title.  Does the seller need to pay depreciation recapture in year 1?

Thanks,

Robbie

[Brandon Hall]

@Robert McEachern a land contract is similar to other forms of installment sales in the eyes of the IRS being that the property is considered "sold" in the year the contract is entered into. Because of this, Section 1250 recapture (depreciation recapture) is owed in full in the year the contract is entered into (the year of the sale). Section 1250 recapture cannot be deferred via installment sales. 

It can be confusing since the seller of the property retains title, however the land contract gives you an equitable interest in said title and restricts the seller from further selling or encumbering that property. Therefore, the IRS views it as a sale in the year the contract is entered in to.

Hope this helps!