Depreciation Recapture on Sale of San Diego Rental Property for Loss

Selling a rental property for a loss with depreciation recapture taxes can feel like giving up your prized possessions. You know you’re able to gain something by letting them go. But, simultaneously, you know you’ve lost something important. Hence, you’re still determining whether you’ve made the right decision.

Below, we’ll talk about depreciation recapture on the sale of San Diego rental properties for a loss, how it affects rental property losses, and what other options you have, so keep scrolling!

What Is Depreciation Recapture?

To help you understand what depreciation recapture is, let’s talk about depreciation first. Depreciation is an annual income tax deduction that enables you to recover your investment property’s cost. Hence, you might be able to lower your taxable income.

Depreciation recapture on selling your San Diego rental property for loss is a tax rule where you get taxed on the profits you’ve made from selling the investment property. The amount of depreciation recapture is computed based on the difference between your rental property’s sale price and its adjusted tax basis.

Once you’ve sold your rental property at a loss, you’ll need to report depreciation recapture and the profits from selling the property through Form 4797 of the Internal Revenue Service (IRS).

How Does It Affect Rental Property Losses?

Depreciation is useful for rental property owners in reducing taxable income. However, when it comes to selling San Diego property at a loss, you may need to pay back part or all of the depreciation deductions on the taxes.

Moreover, you must report your gain upon selling your rental property as ordinary income, not capital gain. Recaptured depreciation is taxed at a maximum of 25%. This is why several property owners end up shocked once they receive their tax bills after selling their investment property.

Let’s say you own a rental property, and you were able to claim a $5,000 depreciation expense. This results in lower taxable net income. Later on, you decided to sell the property due to several factors. These include tenant and management problems as well as expensive repairs. Almost 1.7 million tenants receive eviction notices yearly for failing to pay rent. In 2021 alone, about 11% of rental property owners were estimated to sell at least one property. Moreover, in 2022, homeowners spent an average of $6,000 on repairs and maintenance.

Now, after selling the property, you’ll have to pay tax on recaptured depreciation of up to $1,250 or 25% of $5,000. Tax brackets vary, but the maximum depreciation recapture tax is 25%. Hence, even if you had a $3,000 capital gains loss after selling your property at a loss, you still have to pay a maximum of $1,250 for the recaptured depreciation.

Get a Cash Offer

Depreciation may help you recover your property’s costs. Still, depreciation recapture on the sale of San Diego rental property for loss requires paying taxes even when you suffer from property loss. Want to skip the hassle of selling property at a loss and ensure that you still get a fair price? Receive an instant cash offer from I Buy SD!

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You don’t have to go through complex and costly processes to “sell my house fast San Diego“. Connect with us or complete our form, and we’ll review your property. Then, we’ll give you a quick competitive cash offer. Feel free to take your time in accepting the offer. Once you close, you don’t need to spend anything. You can use the whole amount to realize your goals for your family or business. Get your free instant cash offer today!