When the pandemic hit, seems like everyone started working remotely, and created a home office. The IRS lets us write-off that portion of the home for business use. I’m not going to get into the methods or calculations for the deduction, but the tax implication when that home is sold.
Depreciation recapture comes into play when you sell a property that you’ve used for business or rental purposes and have previously claimed depreciation expenses on it. In the context of selling a home with a home office, if you’ve been using part of your home as an office and have claimed depreciation on that portion of the home, you may have to recapture some of those depreciation deductions when you sell the property.
Here’s how it works:
Claiming Depreciation: When you use part of your home as a home office, you can typically deduct a portion of your home-related expenses, including depreciation, as a business expense on your taxes.
Depreciation Expense: Depreciation allows you to deduct the cost of the portion of your home used for business over its useful life. This reduces your taxable income during the time you’re using the property for business purposes.
Recapture: However, when you sell the property, the IRS requires you to “recapture” some of the depreciation deductions you’ve previously claimed. Essentially, you have to pay taxes on the depreciation deductions you previously took.
Tax Treatment: The recaptured depreciation is taxed at a special rate called the “depreciation recapture rate,” which is usually higher than the capital gains tax rate. The depreciation recapture rate is typically 25% for real estate.
Calculating Depreciation Recapture: To calculate the depreciation recapture amount, you need to determine the total amount of depreciation you’ve claimed on the home office portion of your property over the years. This amount will be subject to recapture when you sell the property.
Impact on Taxes: Depreciation recapture can increase your tax liability when selling the property, so it’s important to account for it when planning the sale of your home. However, if you’re eligible for the Capital Gain Exclusion (up to $250,000 for single filers and $500,000 for married couples filing jointly), you may be able to exclude some or all of the gain from the sale from your taxable income, which could offset the impact of depreciation recapture.
Note: If your Capital Gain for the sale is more than the exemption, you could have a Capital Gain tax and the Depreciation Recapture. Setting aside an appropriate amount for taxes would be prudent.
As tax laws and regulations can be complex and subject to change, it’s essential to consult with a tax professional for personalized advice regarding depreciation recapture and its implications for your specific situation.
If you are in the Los Angeles area, and have any questions or real estate sales or financing needs, feel free to contact me
Ron Henderson GRI, SRES, SFR, RECS, CIAS
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
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www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
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