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How do I calculate depreciation recapture?

Posted on July 30, 2012 by Jeff Hobbs

How do I calculate depreciation recapture? Let’s take a look at the process.

1) Review the original price paid for the asset being sold. For example, let us say you are selling a commercial property purchased eight years ago for $500,000.

2) Add the depreciation expense claimed each year you owned the property. Suppose, for instance, you claimed $12,820 in depreciation expense each year for those eight years, totaling $102,560 in depreciation expense. The depreciation method used was a 39-year straight-line method.

3) Now, subtract the total depreciation expense claimed from the original purchase price of the property to determine your adjusted cost basis. In this example, your adjusted cost basis is $500,000 - $102,560 = $397,440.

4) Next, subtract the adjusted cost basis of the property from the property's selling price to determine your total gain. In this example, you sell the commercial property for $550,000; your total gain is $152,560 ($550,000 sales price - $397,440 adjusted cost basis).

5) Okay, subtract the total depreciation expense calculated in Step 2 from the total gain to compute your capital gain (as opposed to your depreciation recapture gain). In this instance, your capital gain on the property is $152,560 - $102,560 = $50,000. Your depreciation recapture gain is $102,560.

6) Multiply your capital gain by the capital gains tax rate and your depreciation recapture gain by your ordinary income tax rate to determine your total tax liability. If the capital gains rate is 15 percent and your ordinary income tax rate is capped at 25 percent, the total amount of tax you owe on the sale of your property equals (15 percent x $50,000, or $7,500) + (25 percent x $102,560, or $25,640) = $33,140.

So, in this example, the depreciation recapture is $25,640 and your capital gain is $7,500.

Any questions or comments are welcome!

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