1997 Tax Act Q & A

QUESTION:
What is depreciation recapture?

ANSWER:
The Tax Code allows depreciation: an allowance for the supposed loss in value due to the wearing out of an asset.

Assume that you are married and bought a rental property $240,000. You allocated a portion, $60,000, to the land, and depreciate the balance allocated to the building over a 15 year period, at the rate of $12,000 per year. Now, you move in, after claiming a total of $110,000 depreciation, stop depreciating the home, and after living there at least 2 years, you sell the property for $600,000.

Your basis is $240,000 - $110,000 = $130,000.
Your sales price (after expenses of sale) is $600,000.
Your profit is $470,000.

It's all tax free, other than any depreciation for the period after May 6, 1997, which is taxed at 25%

For more information, see 1997 Tax Act
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