Revisiting Depreciation Recapture Issues When Cashing Out (Not 1031 Exchanging)

It is that time of year again when we field many questions regarding the reporting and tax treatment of 1031 Exchanges, or lack of 1031 Exchanges, on taxpayers income tax returns. 

There seems to be many more questions this year because many taxpayers just sold and cashed out rather than 1031 Exchanging again, and now have significant income tax liabilities. 

The one income tax issue involved with rental property that is often misunderstood is depreciation recapture.  Depreciation is mandatory if you buy and hold rental property or investment property, and the depreciation is deferred into the future upon sale of the rental property as long as you are structuring a 1031 Exchange transaction.  However, the depreciation will be recaptured upon sale if you are not 1031 Exchanging.

This is the reason that we have noticed an increase in depreciation recapture questions.  So, I thought that I would link to an discussion board post on depreciation recapture that will help explain the issue in greater detail.