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Tax Guru-Ker$tetter Letter
Thursday, March 31, 2005
 

Q:

Subject: Depreciation Recapture

For purposes of determining the basis of the relinquished property (single family rental dwelling) in a 1031 exchange, do we need to recapture the depreciation on the property taken on the straight line method? Please help.

 

A:

The depreciation you have claimed on the old property does reduce its costs basis on your books.

However, you do not have to recapture - pay tax on -  any depreciation because of the 1031 exchange if your replacement property meets or exceeds the target price and you don't take any cash (aka boot) out from the transaction.  The basis of your old property is rolled into your new replacement property, via IRS's Form 8824.

If you do take some cash out or acquire a property for less than the net sales price of your old one, you will have taxable gain to report, which will be the depreciation recapture because that is subject to the highest tax rate (generally 25% for IRS).

I hope this helps you understand the process a little better.  Your personal tax advisor should be able to fit this to your specific numbers.

Good luck.

Kerry Kerstetter

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- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/31/2005 05:49:00 PM Send this post:

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