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Selling a rental property for a loss can feel like taking a bite of a sour lemon. It leaves a bitter taste and can be a tough pill to swallow. What if I told you there’s more to it than losing money? Depreciation recapture is a tax concept that can further sour your experience if you’re unprepared.
If you’re a landlord in Arizona considering selling your rental property for cash, it’s essential to understand depreciation recapture and how it affects your losses. According to a recent report by Mashvisor, Arizona ranks 4th in the top 10 states to buy a rental property, making it an attractive market for landlords.
However, another report also found that the state has many eviction cases, meaning landlords must be cautious when managing their rental properties. In this post, we’ll explain what depreciation recapture is, how it works, and your options for selling your rental property for a loss. Let’s get started!
What Is Depreciation Recapture?
Depreciation recapture is a tax provision that applies when you sell a rental property you’ve depreciated over the years. Depreciation is a deduction you take on your tax return for the wear and tear on your property over time.
When you sell your rental property, the IRS requires you to pay taxes on the depreciation you’ve claimed over the years. This is known as depreciation recapture. The depreciation recapture tax rate depends on the property type you’ve sold and the tax bracket you’re in. In general, the tax rate for depreciation recapture is 25%. However, if you’re in a higher tax bracket, you may have to pay a higher rate.
How Does It Affect Rental Property Losses?
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Depreciation recapture can compound your losses when you sell a rental property for less than what you paid.
Suppose you bought a rental property for $300,000 and claimed $100,000 in depreciation over the years. If you sell the property for $250,000, you’ll lose $50,000. However, you’ll also have to pay depreciation recapture taxes on the $100,000 that you claimed in depreciation. At a tax rate of 25%, that’s $25,000 in additional taxes you’ll owe. Your total loss will be $75,000 ($50,000 loss + $25,000 in taxes).
The rationale behind this is that the taxpayer has experienced a reduction in their ordinary income over the past years due to the annual depreciation cost. This results in a lower tax liability for the taxpayer. Furthermore, by recapturing the depreciation, the government can recover some of the tax benefits given to the taxpayer over the years.
If you’re looking to sell your property for a loss, there are a few options that you can consider. One option is tax-loss harvesting, where you sell your rental property for a loss and use that loss to offset capital gains in other investments. However, consulting with a tax professional is essential to ensure this strategy suits your specific financial situation.
Another option is the conversion of the rental property into a primary residence. This option can be viable if you can move into the property and live there as your primary residence. Finally, Section 1031 of the Tax Code allows investors to defer paying taxes on the sale of rental properties if they reinvest the proceeds into another investment property of equal or greater value.
The best option for you will depend on your financial situation and goals, so it’s important to consult a professional before making any decisions.
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Doug Hopkins’ team of real estate experts can help you sell your rental property for cash. Our team has years of experience in the real estate industry; Doug Hopkins’ team can provide expert advice and guidance throughout the selling process. We offer a free instant cash offer for your home, so you can find out how much it’s worth without obligation.
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Depreciation recapture is a vital tax concept that you need to be aware of if you’re a landlord in Arizona looking to sell your rental property for cash. By understanding how it works and what options you have, you can make an informed decision about selling your property if you need to sell my house fast.
If you’re ready to sell your rental property for cash, Doug Hopkins’ team can help you do it online. We offer a simple and convenient online selling process, allowing you to sell your property from the comfort of your home. Doug Hopkins’ team will provide you with a cash offer within 24 hours. If you accept the offer, we’ll handle all the paperwork and closing details, so you can quickly and easily get your cash.
Sources:
- https://www.mashvisor.com/blog/best-states-to-buy-investment-property/
- https://www.12news.com/article/news/local/arizona/its-draining-arizona-evictions-are-on-the-rise/75-44510ab8-3386-4216-95e6-57b7d3455809
- https://www.wallstreetmojo.com/depreciation-recapture/
- https://www.thebalancemoney.com/depreciation-recapture-3192979
- https://www.investopedia.com/terms/d/depreciationrecapture.asp
- https://www.investopedia.com/articles/personal-finance/121415/how-prevent-tax-hit-when-selling-rental-property.asp
- https://learn.roofstock.com/blog/how-to-avoid-capital-gains-tax-on-rental-property
- https://www.investopedia.com/articles/06/section1031exchange.asp
