depreciation recapture

Dear 1031x.com: What is meant by recaptured depreciation?

 

Dear K:  Depreciation is a tax convention.  On improved real estate the taxpayer is allowed to depreciate the improvements.  First improvements are valued separately from the land and your tax basis is allocated between the land and the improvements prorata.  Thereafter, the taxpayer is allowed an annual  noncash expense of holding the real estate; this is known as depreciation.  The most common depreciation allowance is as follows:  On residential rental property you are allowed a depreciation allowance equal to 1/27.5 of the basis in the improvements.  Over your years of owning the real estate the depreciation is added together from year to year.  Your tax basis is reduced by the depreciation allowed year by year.   Finally, if the property is sold at a gain, the accumulated depreciation is "recaptured" and taxed at a different (higher) tax rate than the long term capital gain (appreciation in value).  I know this is a complicated answer, and I have tried to answer your question as simply as I can.  Of course, a successful 1031 exchange defers all income tax liability.  If you need more I suggest that you call me.  Sincerely,

Steve Hickox
Attorney / President

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