Long-term
• Adjusted basis = $200,000 • Net sales price = $250,000 • Depreciation recapture = $7,200 • Taxable gain = $50,000 + $7,200 depreciation recapture = $57,200 • Capital gains tax due (15% at mid-range capital gains tax rate) = $8,580 In this example, the real estate investor with a short-term investment strategy pays nearly 40% more in capital gains tax ($12,000 - $8,580 = $3,420) than an investor with a longer-term investment plan. How depreciation recapture works The IRS requires real estate investors holding property over the long term to recapture – or give back – the annual non-cash depreciation deduction made to reduce taxable net income. For depreciation tax purposes, residential rental property is assumed to have a useful life of 27.5 years. In the “Long-term” section above, roughly one year of depreciation was recaptured. The most recent IRS Publication 527 tells investors everything they need to know about residential rental real estate depreciation. Ways to avoid capital gains tax on a rental property When it comes to paying capital gains tax, many real estate investors believe they only have two choices: paying a short- term capital gains tax now or paying later at a lower, long-term capital gains tax rate. Of course, some taxpayers may feel that it’s their civic duty to pay as much tax as possible. However, simply because other people believe the best use of their money is to give it to the government, it doesn’t mean that you have to, too.
Here are four strategies you can use to avoid, reduce, and defer
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