Real Estate CPA Website Article Garbage? Depreciation Recap OppZo

[Aaron Moayed]

This guy's article states that depreciation recapture exclusion is not possible with the opportunity zone 10-year-hold:

https://www.therealestatecpa.com/blog/real-estate-...

Yet these other articles are stating that capital gain tax AND depreciation recapture tax are not taxable at sale:

https://www.thetaxadviser.com/news/2019/mar/irs-qu...

https://www.accountingtoday.com/opinion/opportunit...

It's my understanding that the step-up in basis would make the latter folks correct here (i.e., no depreciation recapture tax on 10-year-hold sale).

Thoughts? Any CPAs informed on this topic?

I'm also wondering if his mention that cash from non-deferral sources (i.e., QOF generated from regular funds not capital gains deferred funds) would not gain the 10-year CG-free benefit?

[Michael Plaks]

@Aaron Moayed

I finally had time to read the article that you attacked. It's accurate in every respect, and it does not contradict anything written in the other two articles. Thanks for the links, by the way.

The whole debate comes from a very common misunderstanding, common even among CPAs who are not real estate specialists. So you being confused about this issue is very excusable.

There're TWO, not one, concepts referred to as "depreciation recapture." 

The first one is the familiar kind: you depreciated a house for 10 years, and then you have to "recapture" it at sale. Technically, it should not be called depreciation recapture, even though we all do. The correct term is Unrecaptured Section 1250 Gain. It is taxed at rates capped at 25%, as opposed to ordinary rates - a subtle but very important distinction. This kind of gains is simply a variation of capital gains, and it can be deferred with OZ, with 1031 exchanges and with installment sales.

The second one is true depreciation recapture. It's recapture of depreciation taken over and above straight line depreciation. It is taxed at ordinary rates, and it is the very kind of depreciation recapture specifically excluded by the rules. However - this depreciation recapture is extinct. It does not happen in real life, save for some rare cases of very old properties. The fault of the article is not articulating this distinction, which left room for interpretation. But technically speaking, the article is correct. Just not very clear.

PS. There is a 3rd type of depreciation recapture (Sec. 1245), but let's spare ourselves from further confusion.