How much is rental depreciation recapture taxed at?

Hi! If I have rented out my primary residence and claimed depreciation expense to the rental income, and were to now sell the property, at what tax rate will the total depreciation expense be taxed at now? I'm seeing conflicting information of being taxed at 15% long term capital gains tax to max of 25% to at ordinary income tax bracket which could go up to 37%. Also, will freetaxusa be able to accurately account for the tax implications on the software for this situation, or should is this an edge case I approach a CPA for help with? Appreciate any guidance on this!

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CoryF

Thank you for joining our community, Angela25.

This is a good question to ask. Depreciation is an ordinary income expense. Meaning any recapture of the depreciation at the time of sale produces ordinary income to be added to your total income. It will then be taxed at the tax rate that your taxable income ends on. The favorable reduced tax attributed to Capital Gains for long-term held property, 15%, exists for the amount of Sale above cost basis and the depreciation recapture amount.

FreeTaxUSA does have this capability to report the claimed depreciation. Please see the response by RachelS in this discussion point for steps to report the depreciation recapture process using FreeTaxUSA

If you need further help with this reporting process to ensure it is reported correctly, please do not hesitate to contact our Support agents. You can visit the Support center dropdown at the top right-hand corner of your account screen for more options.

angela25

Thank you for your reply!

If I have carried over losses from the rental income in prior years, can I deduct it from the overall depreciation recapture taxed during sale of the rental property?

MatthewD

Hi angela25,

https://community.freetaxusa.com/discussion/comment/5087#Comment_5087

The software will handle functions like this when reported. The passive rental losses are carried over from year to year and become an adjustment when that particular rental property is sold. But the accumulated losses will not be used against any depreciation recapture from another property. They are reported differently, even though it seems related.