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Depreciation Recapture
The IRS requirement to pay taxes on accumulated depreciation deductions when a property is sold.
Definition
Depreciation recapture is the tax owed on the cumulative depreciation deductions claimed during ownership when a property is sold. Even if you did not claim depreciation on your tax returns, the IRS considers it "allowed or allowable" and will tax the recapture. The depreciation recapture tax rate is 25%, which is higher than the standard long-term capital gains rate of 15-20%. For example, if you claimed $100,000 in depreciation over your hold period, you owe $25,000 in depreciation recapture tax at sale, in addition to capital gains taxes on any appreciation. A 1031 exchange defers both capital gains and depreciation recapture taxes.
Related Terms
Depreciation
A tax deduction that accounts for the wear and tear of a property over its useful life.
1031 Exchange
A tax-deferred swap of one investment property for another, deferring capital gains taxes.
Capital Gains
The profit realized from selling a property for more than its original purchase price.
Cost Segregation
A tax strategy that accelerates depreciation by reclassifying building components into shorter-lived asset categories.
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