Depreciation Recapture Calculator for Rental Property

How to use the depreciation recapture calculator

Enter:

• Purchase price of the property.
• Land value, which you can’t depreciate. Your county assessor’s split between land and improvements is a common starting point.
• Improvements, such as a new roof or a kitchen remodel, that you added to the basis. Repairs you deducted in the year you paid for them don’t count here.
• Years held as a rental.
• Sale price.

The calculator shows the depreciation taken and an estimate of the recapture tax.

The depreciation recapture formula

• Depreciable basis = purchase price - land value + improvements
• Annual depreciation = depreciable basis / 27.5
• Depreciation taken = annual depreciation x years held (no more than the depreciable basis)
• Adjusted basis = purchase price + improvements - depreciation taken
• Total gain = sale price - adjusted basis (less selling costs, if you have them)
• Unrecaptured section 1250 gain = the smaller of depreciation taken or total gain
• Recapture tax, at most = unrecaptured section 1250 gain x 25%

A worked example

You bought a rental for $300,000. The county values the land at $60,000. In the first year you put on a $20,000 roof. You held it for eight years and sell for $420,000.

• Depreciable basis: $300,000 - $60,000 + $20,000 = $260,000
• Annual depreciation: $260,000 / 27.5 = $9,454.55
• Depreciation over eight years: about $75,636
• Adjusted basis: $320,000 - $75,636 = $244,364
• Total gain: $420,000 - $244,364 = $175,636
• Unrecaptured section 1250 gain: $75,636
• Recapture tax at the 25% maximum: about $18,909

The other $100,000 of gain is long-term capital gain, taxed at 0%, 15% or 20% depending on your income, plus the 3.8% net investment income tax if you’re over its threshold.

What a good result looks like

There’s no good recapture number, only an expected one. What you want is no surprise. If you sell after eight years, plan for the recapture tax on top of capital gains tax, and keep cash aside for it from the sale proceeds.

If the number is large, look at your options before you list the property. A 1031 exchange defers both the capital gain and the recapture. Selling in a year when your other income is low can put the recapture portion in a lower bracket. Your tax preparer can model both.

Limits and caveats

• Mid-month convention. The IRS doesn’t give a full year of depreciation in the year you buy or sell. It counts from the middle of the month the property was placed in service. Your real figure will be a little different from years held x annual depreciation.
• Improvements have their own start dates. An improvement made in year five depreciates from year five, over its own 27.5 years. Some items, such as appliances and carpets, can use shorter recovery periods.
• Selling costs reduce the gain, but not the recapture portion unless the total gain is smaller than the depreciation taken.
• State tax isn’t included. Most states tax the gain too.
• This is an estimate for planning, not tax advice. Your Form 4797 and Schedule D are prepared from your actual depreciation records.