Sale of a Rental Property Tax Consequences & Depreciation Recapture

In this video, we discuss the sale of a rental property and the expected taxes associated with the gain on the sale of the rental property. You need to take into consideration the depreciation recapture which taxes a portion of your gains at a higher tax rate than your long-term capital gains.
The sale of rental property tax treatment will be a combination of capital gains composed of usually long-term capital gains taxed at either the 15% rate or 20% rate and also the higher 25% rate of depreciation recapture. So if you were wondering about the rental property tax or the sale of rental property tax treatment, this will be a great video for you.
This video focuses on the federal income taxes with the IRS. Depending on your state, your state-specific taxes will be unique to the state that you live in for the rental property sale.
Additionally, this video focuses on the capital gains on the sale of the rental property. Please refer to our other videos for accumulated losses that get released during the sale of the rental property. Please refer to our other videos for rental property activities and deductions on the Schedule E for the years that you are renting out your property for recording the rental income and rental deductions. We have a great video about most frequently missed deductions for rental properties and the Schedule E.
And as always, please leave us any comments or questions below, we'd be happy to get back to you.
Thank you!
From the ClearValue Tax Team.

[@clearvaluetax9382]

For more information, check out our helpful website: clearvaluefinance.com/

[@leroyalveranga9300]

Thanks for the info. What about capital losses as it relates to depreciation?

[@smojovi]

Link is broke.

[@marcelal-kaththaab4324]

Like is broke.

[@Nerd-u2u]

Looks like the website is not working. Are you still in business? And are you still taking on new clients?

[@cristianvidal1390]

Great info, but if I claim $2,000 of depreciation, it doesn't mean that I am bringing $2,000 to my pocket, so why does the IRS recapture $2,000? Or, will I get my $2,000 as long as I have the receipt?

[@TheJosa007]

I can not believe I was able to follow everything you said, only because of the pains you took in explaining this video in way regular joe's like me can understand. Thank you very much !!!

[@clearvaluetax9382]

This was one of our more technical videos!!! If you can follow, that's awesome!

[@Honestandtruth007]

@@clearvaluetax9382 The house fair market value is $240,000, but I Sell it to my brother for $ 67,000. What is my Sale Tax on this house ??

[@trainingwithkap]

Excellent job explaining this. I am one of those long-term landlords with one property which has been rented for 26 year and a second for 30 years. This is very helpful in making decisions for my legacy to my only child.

[@shahkhan5952]

I'm an auditor for a taxing agency. This is one of the best informational videos that I have seen on the subject. I enjoy all of your videos. Keep up the good work.

[@melissat8803]

Did he miss explaining at the end that your taxable income also is a factor in what rate you pay in capital gains taxes? Single 0% rate - $0-$40k income 15% rate - $40k-441,450 income 20% rate - over $441,450 income Married filing joint 0% rate - $0-80k income 15% rate - $80k - $496,600 20% rate - over $496,600

[@HeatherDMorris]

Very clear. I watched a 2 hour video last night and fell asleep still not understanding! Thank you !

[@ky3079]

Thank you so much Brian. Can’t believe my CPA doesn’t explain this to me. I’m selling my rental property and have questions about this topic. You just answer my questions. My CPA would have charge me a zoom meeting to discuss this topic with them.

[@ImNotaRussianBot]

CPAs didn't go to school to teach accounting, they went to school to apply accounting to the real world. If you want to know, these types of videos and the entire damn internet is at your disposal.

[@HolyShit421]

Yeah, we are really busy. We charge for our time.

[@DayanaPlays]

Idk how I didn’t find this channel before! This is the best channel on KZbin.

[@michelleroberts9138]

A-MA-ZING!!! I have been trying to figure this out all day long. Thank you, thank you, thank you! NO ONE has explained it as well as you just did and I get it now 🙏🙏🙏

[@dnafinsolutions]

My son and I watch your current videos almost daily and this goes to show, YOU ARE THE GOAT! Thank you for providing value to us as we grow our tax practice! This was so freaking helpful!

[@sunlight4169]

I cannot count how many times I have researched depreciation recapture and tried to understand the posts, blogs, and "tax advice" pages I have visited that "attempt" to explain this tax, and always come up scratching my head a bit and throw in the towel. I can honestly say this is the first time the entire concept of depreciation recapture has crystallized (for the layperson) in my head to the point where I can pick up a calculator and actually attempt to figure it out and feel reasonably okay with my calculations (yet of course I seek tax advice). So again I cannot thank you enough because after selling a property last year I have had so much angst, heartburn, and even lack of sleep about this as tax deadline looms SO close. THANK YOU -THANK YOU -THANK YOU from a "new" subscriber :) PS. My tax advisor stated that acquisition closing costs are usually not included in the basis, but he did not seem very confident of his statement about the acquisition closing costs. So I may be contacting you :)

[@Wayfarer805]

I'm an engineer and I know numbers... but not financial numbers. It seems calculus is easy but accounting is hard. Thanks for the excellent explanation on depreciation and calculating taxes including the depreciation recapture tax. You've made it easy "even for an engineer" to understand.

[@jonklause5130]

You explained things so that I could easily understand my tax situation when I sell my house. Thanks for putting out a video that people can easily follow.

[@biancabauerle2690]

FINALLY!!! Someone who explained it clearly and wasn't all over the place.

[@2Electrified]

Greay video. Easy to follow and understand. Here is my situation. Purchased our Condo back in 2005 for $128,000. Converted to Rental in 2012 and sold it Jan 2019 for $104,000. We never took the depre expense for those 6yrs. We took the FMV that it was in 2012 at the time of the conversion which came to $54,700 as the cost basis to determine depreciation recapture (54,700/27.5 =1989) 1989x6(yrs)=$11,934 We found closing costs on the sale for $2675, so we added that $54,700 which came to $57,375 no commission which became our Cost basis plus expenses. Then we took $57,375 minus $11,934 (deprec we should have taken) = $45,441 which is our Adjusted Basis. So our total gain is $58,559 (104,000-45,441). So my understanding the first $11,934 deprec recapture will be taxed at 25% and the remaining $46,625 ($58,559-11,934) will be taxed at our Capital gain rate correct? Did we figure this out correctly since we did not take the depr expense at all? And do we put this on Form 4797 Part III section 1245 lines 20 through 25b?

[@KasultyZu]

You truly know your stuff, and is amazing at explaining those complex tax issues in a way that can be so easy to understand. Love these videos. Wish you can be my CPA one day.

[@hebergonzalez91]

Outstanding video!! You explained it so eloquently in such a short period of time better than my own CPA did! I was able to follow through the entirety of video without any issues. Truly helped so much!!! The part where you said the accumulated depreciation recapture is greater for a long term rental vs one that’s been rented for 1-3 years was the part that helped solidify my decision to go ahead and sell the rental. Well first going to attempt the 1031 but I feel more informed now than I did earlier!

[@engineerdan9633]

Awesome video! Logically arranged, clearly explained, detailed and well spoken. Voice and mannerisms kept the video interesting until the end. Well Done!

[@truthseeker6610]

This is the best video I have seem on the sale of rental property. Very clearly explained, thank you.....

[@carpediem9718]

Very informative! So basically, accumulated depreciation is taxed at 25% and the rest of the gain is taxed at 15%

[@clearvaluetax9382]

25% for depreciation recapture rates. However, if you're making above ~$464K, then your long-term capital gains rates are 20% instead of 15%.

[@carpediem9718]

ClearValue Tax so I will still have to pay CA tax on capital gain? There’s no such thing as CA tax exemption on capital gain? What if I am 100% disabled military retiree? Does that make me exempt? Can you prepare taxes on CA residents?

[@clearvaluetax9382]

@@carpediem9718 Hi Carpe Diem, there are many benefits of such situation such as potential of property tax exemptions or paying no taxes on certain pension income in that situation, however, the capital gain income not connected with your service income will not be treated differently in this situation. And yes, we prepare tax returns from people all over country and even out of country.

[@il10xm33jol]

I love how you explain in detail. I actually learned something. Thank you so much. Kuddo to you to for explaining it very clearly.

[@joebushnell143]

This helped me better understand the whole basis issue a lot. Much appreciated. Hope you do more of these.

[@nairbudy6403]

First time i’ve ever understopd depreciation recapture! Thanks!

[@nefertemur8951]

Greetings Clear Value Tax, you are awesome Brain, as you answered my questions, I have subscribed and hit the thumbs up button. Thanks for sharing.

[@TheJosa007]

I so understand it the way you explain it, I have the job of explaining that to my brother in law. WOW !!! No wonder I din't choose to be an accountant. Thanks again.

[@clearvaluetax9382]

jajajajaja thanks again E Galindo!

[@lowelllarsen5947]

This is a very valuable channel and you are a good teacher

[@mahalo6727]

Great explanation. Loved the examples, made it very easy to follow. I will be selling my rental property in 2022, and will use this information to estimate my capital gains tax.

[@lynettesmp]

Awesome! Very clear illustrations and explanations!

[@bmac6746]

Good vid,best explanation so far I have found. A few questions; 1. Sold rental in 2019. Rented for 10yrs, have both HUD statements..what do I do with my rental 1098 interest/insurance? Is it a rental expense or 2nd home or add to basis? 2. If rental expense, can I add things that can't be added to the basis? Utilities, lawn care? Maintenance things awaiting a buyer or tenant 3. You mentioned claim improvement for life of rental? What about repairs made that was not added to depreciation? Dishwasher, new carpet? Thank you

[@seltzermom2694]

Thank you! Best explanation I have found! Appreciate this video!!!

[@jackygiant]

This helped me a lot in trying to learn about 1031 exchange. Thank you and you earned a subscriber.

[@clearvaluetax9382]

Awesome, I'm happy to hear it helped. Thanks so much Jackygiant!

[@MrAlexMillan]

This is a great video. I'm excited to see more in the future.

[@clearvaluetax9382]

Thank you Alexander!

[@Honestandtruth007]

@@clearvaluetax9382 Hello, I am Happy you are married...👍👌💟👨‍👩‍👧‍👧 My house Fair market value is $ 240,000. But I Sell it for $ 67,000 to my own brother. So What is the Sale Tax for me... ????

[@carlageraldi9033]

I am learning a lot from you. You are very good! thank you for your time!

[@bahrainiandreams]

Thank you, great explanation of unrecaptured capital gains.

[@lebranch6741]

I can't thank you enough for all of your videos. They have been VERY informative and you explain it so well. Thank you

[@tritynguyen1061]

I wonder if you have EA tax class to take, your knowledge and the way you present information are so clear, easy to take in and understand. Please let me know.

[@julitatugade3147]

I will ask you questions when I sell my property sometime this year. I use turbo tax every year thx 😊 🙏

[@cassiem4693]

This was broken down so good. Thanks

[@DavidFormica]

great video, but I wish you would show the numbers on the screen as you discuss them...but I get the gist of it and will certainly rewatch till I got the equation down. Thanks again Brian :)

[@慕博士谈财商]

thanks for your video, you explain it well, and easy to understand, like your video

[@adarshbajaj8433]

Thank you Brian. Another great video

[@lukeats3377]

Excellent video, going through the example is very helpful. Thanks!

[@kdefensemartialarts8097]

Thank you for your videos.

[@marcelosampaio604]

Amazing video! Many doubts solved! Waiting for more videos!

[@clearvaluetax9382]

Marcelo, first of all, you are awesome! Thanks for the support and encouragement, you're a blessing! Yes, I'm going to make a lot more videos this year!

[@kathleenmerriman9117]

I was able to understand all you said but I wanted you to fill out forms so I could see what forms you would use.

[@mrs.riche3939]

Wow just saw this so helpful! Thank you!

[@DiederikVerhoef]

Super helpfull! Thanks so much.

[@irishkevin4307]

At 4:44 you mention capturing improvements on your Sched. E., if you write off some or all of the improvements made to the property during that year on Sched. E, , I believe you can't add them to your cost basis at the time of sale...you have to know what is considered to be a repair vs. an improvement. According to the IRS you can only write off a repair on your Sched. E...

[@peechengchen7414]

thank you.. this was very helpful.

[@Honestandtruth007]

This is Very good Explanations. Thank you my brother...👍👍. God bless

[@petesis7934]

That was an excellent video. Thank you.

[@GolfTroop]

Great video! Keep making them!!

[@clearvaluetax9382]

Thank you Stewie!!

[@ericraj5468]

HELPFUL AS ALWYZ.....THANK YOU SIR.

[@CeciliaMarieAngela]

Do you have any videos showing how to take the carryover schedule E rental losses against the capital gains of the sale of the rental property?

[@reocurringdream]

Thank you for your video. You're the only one that has made me understand how this works. My question is: If you sell for a loss, do you still owe depreciation recapture?

[@jkbc]

Hi I have questions about deductible items when I purchased a new home. Sorry I know these questions are irrelevant with this video, I just wondered if you have made a video about this. Thank you.

[@jimkolberg6847]

I so love your a proxy in explaing smoothing so complex an making it I can understand it. Keep it up

[@noshabasarwar9660]

Very well explained. Thank you

[@ScottiMac0007]

This is an excellent explanation of selling a rental home for a gain. Would it be possible to post a similar video for the unfortunate scenario of selling a rental property for a loss and how that affects depreciation recapture?

[@clearvaluetax9382]

That's a very good topic. Yes, I'll have to make that video, good call. You won't be subject to depreciation recapture on a loss. However, please remember that depreciation reduces your cost basis.

[@syfyrytr1652]

BEST explanation !!! Thanks...

[@Eager2BFit]

I love the video. However, after following the steps to get my net gain I will then need to subtract the remaining balance of my mortgage loan right?

[@olivercarter8416]

Please make a video on this scenario. What happens in the event of a property being your primary residence (long term investment = exclusion) multi family Sch E was never depreciated therefore there’s no cap gain recapture. But you have refinance the property once and the sales price is over $1,000,000. Purchase price is $450k. No major repair, So we are looking at a high cap gain therefore the 1031 exchange is very difficult due to the deadlines rules. Please make a video on this scenario.

[@olivercarter8416]

I called it difficult bc of the rule on the new purchase to avoid the tax liability. It will be helpful for those in the real estate investing business to learn this because paying taxes is not ideal. Lets just call it deferred taxes are more attractive.

[@michaelshin4111]

Great video! Thank you!!!

[@ponzianomanning3071]

Can you provide a video about how to Loopholes to avoid depreciation recapture? Thank you!

[@miguelalvarado1440]

It was really understandable! Thanks!

[@packburst3704]

QUICK QUESTION. YOU ADD CLOSING COST ( BUYING AND SELLING) TO COST BASIS... CAN YOU ADD CLOSING COST IF YOU REFI LOAN. SO IT WOULD BE CLOSING COST ( BUYING+SELLING+REFI?) + IMPROVEMENTS..... HELP.... GREAT VIDEO !!!

[@Cello69.]

Thats my question. I refinanced my rental 2 times. So do I add those 2 plus the closing cost of the sell... for a total of 3 closings? Did you ever find an answer?

[@goodday2076]

Thank you for this clear explanation about most people are missing and scared to face, the depreciation recapture. My question is where can I find that accumulated depreciation? And where should I put that accumulated depreciation? Should it go to 4797? Which part? I'm using Lacerte.

[@sjtola]

Great video! Can you do a follow up video on strategies to avoid depreciation recapture tax. For example, can you move back into the property, sell it after living in it for 2 years and use the $250k/$500k capital gains deduction to defray some or all of the depreciation recapture?

[@clearvaluetax9382]

Hi Sjtola, yes, that is a great video topic! I plan on making a TON of video after tax season this year after April, and I'll definitely put this on my topic sheet. Seriously, great idea... I appreciate it!

[@sjtola]

@@clearvaluetax9382thanks again, I'm really looking forward to that topic!

[@minhvinhtube]

Great video, Thanks. How about move back there when I'm older after selling my current primary home (down sizing)? Or give it to my son as gift? Thanks

[@williamowens5542]

The depreciation recapture follows you and the property. The way to avoid it is to own it when you die, at which time you will get a basis reset for your heirs.

[@williamowens5542]

@@minhvinhtube Depreciation recapture stays with the owner and the property. Gifting it to your son gives him the recapture. You can avoid the recapture if you bequeath it to him; i.e., you die owning it and he is your heir.

[@claudiafarr5855]

I have a question about the 5043 - RF form that you have to fill out at the close of escrow you have the option of doing this long drawn out taxing process or you can do the sale price withholding amount of 3 1/3% in California. The three and one third tax is a lot less than the long drawn out one. is this a part of what you would pay in the depreciation recapture 25% rate and or the 15% capital gains amount. What happens when you file your income tax at the end of the year? If you haven’t already done this subject in one of your videos I think this would be a really good one to do because this form is a bit different than what you taught in this video which by the way was extremely helpful and I wrote down everything I felt like I was back in real estate school so anyway thank you for this I have subscribed too by the way you have a lot of very good and informative videos

[@mcrage81]

Can one choose to simply opt out of using depreciation. Only deduct maintenance. Save improvement receipts for when selling

[@chicagoan81]

My big question is improvement. If I had to replace the gutters with a more modern design is that improvement? painting the exterior panels is improvement too? Putting new appliances is also improvement?

[@susang6329]

During past 10 years we rented 33% of the home out. And with the improvements we got the 33% depreciation when filing the taxes during the year when the improvement was done. The property was sold last year. We are filing tax return now, the question is: Can we add the total cost of improvements to the cost basis or can we only add (100% - 33%) 67% of the improvement costs to the cost basis. Thank you very much in advance for your answers.

[@trinhhuynh2481]

Can you create a video on rental income as a passive investor with K-1? How to claim passive income from the K-1 and tax implications when the property refinance or sell the property. Thanks!

[@clearvaluetax9382]

That's a good idea Trinh, thank you for the suggestion!

[@donpablos123]

Thanks a lot. At 8min 50 sec, did you forget the real estate fees ? the typical 6%.

[@WitnessRichness]

Great Content! Thank you 🙏🏽

[@clearvaluetax9382]

Thank you Witness Richness for the feedback and kind words, I appreciate it!

[@SpaceX-Freedom]

Hello and thank you so much for your explanation. I have a question for you . I refinance my rental property with cash out option. Is my cost basis increased ?

[@barbararussell897]

Thanks, very helpful :)

[@robertqualey4597]

Excellent presentation wish my cpa could have explained as well. Question, in qb can you do your deposit of your ...cash to seller to zero out asset. How do you plug in the re-captured depreciation @25% and the long term capital gains rate of 15%.....or no ???? But how do you show on books ??? Thank you Rob

[@TEBCO123]

good video

[@isajthereable]

Great job 👍

[@yongfencao5307]

Thanks for your detailed explanation. I understand depreciation recapture etc. But how do I translate all of these numbers to form 4797? What forms should be used for 25% of depreciation recapture?

[@keithwollaver2307]

Are any closing costs not included? Commissions for example?

[@projectpita6830]

Have a rental units for past 10 + year i owe $220k and est. Market value approx. $675k cost to sell and closing cost approx. $40k ..i am selling them after the tax year as i just retired and want to lose that income bracket due to capital gains. Dont want to 1031, i would like to take what ever is left after capitol gains tp pay down the 4 plex we currently live in. There we owe $ 420k .. the missing li k is , at what rate will i be taxed at so i can know how much i will pay into our current property..thank you for the video btw..just subscribed

[@seeyouthere]

Thanks! Very helpful! Do you also count closing costs for refinances? Both regular and cash out refi.

[@cindyb9809]

Very helpful! Can you claim closing cost of refinancing the loan?

[@henrywong8922]

Thanks for your video..How much tax or tax rate you need to pay for the mortgage that you took out that is over your cost basis?

[@kimvaughn5323]

You explain all of this so well! I do have a question about the depreciation component of the cost basis. Is this depreciation that you are subtracting supposed to include the accumulated depreciation of the Improvements? Thank you!

[@thebestken]

Does K1 from a syndication sale clarifies which portion of the income after the sale is for long term and which portion belongs to the short term gain?

[@kavitamascarenhas2354]

Thx Brian. You are doing a great job. I lived in my property for 5 years and rented it out for less than a year. Now I am considering to sell, how would the costs calculation work out in that case?

[@kshitiz06]

Is there an income limit for claiming depreciation? I have a 9-to-5 job that earns me 170k a year. I recently purchased a rental house. Can I claim depreciation on it? Or does my 170k a year income prevents it? I googled it. And in almost all articles about depreciation says “if your income is 150k or above, you cannot claim rental loss”. This confused me. Articles are about depreciation. But when I read the part I am interested in, they switch the language to “rental loss”. Unless depreciation is considered part of rental loss, I don’t see why everyone would put that in an article about depreciation.

[@longtran-zp3jz]

Really helpful accounting tips. Thanks Brian, I have a question on long term rental property, please. Could you aslo add yearly repairs expenses and attorney's fee to cost basics?

[@NigaHigaLover1027]

Hi there, thanks for this great information. Do you have a video showing us the forms and where we put the figures? I'm not sure where and how the 25% is calculated vs the the 15% on the remainder of the depreciation?

[@NBgreet]

Great video. Another CPA mentioned that any rental loss during the previous years is also tax deductible. Could we include this on cost basis calculation-form 4797?

[@clearvaluetax9382]

Nahla, the accumulated rental losses are claimed on Schedule E, they do not impact the Form 4797 calculation. But yes, accumulated losses are released upon disposition of the property, I have a video explaining when you can use the rental losses.

[@scottthompson3681]

Thank you for the opportunity to have my questions answered. In the market that I am in, values of property don't go up very much. I have a property that I paid $200,000 for and I will probably sell it for $250,000. When I sell it I will have taken full depreciation. I put in over $30,000 in improvements. If I sell it for $250k, does that mean I will pay very little and capital gains taxes? Thank you

[@chefkre1]

Great info. I looked over my Schedule E for the 13 years I rented my property. As it turned out, 6 years the depreciation expense was not taken! Funny thing is that H&R Block did my taxes every year and would advertise about getting you EVERY deduction. So this is about $20,000 in expense never declared, so does that mean it actually will help me during the depreciation recapture?

[@almarubio1524]

Excelent! ✔

[@clearvaluetax9382]

Thank you!!

[@ga6381]

Im very simple, but your explanation was well done. I understand your video, but then sometimes selling a rental property you have had for a long time seems like your getting penalized for either depreciating your property over the course of time or selling your property period.

[@aymanomara7929]

Dose those depreciation recapture can be offset by and passive losses?

[@josh.serrano]

How does refinancing your home play into calculating your cost basis?

[@tazaxx21]

I've had 1 rental property for 33 years.. I doubt I could even find all the paperwork, and records.. so how the heck would I figure out how much I will owe for the sale of my property?

[@debrastellato6250]

Similar situation here. The closing costs on purchasing isn't that much, especially compared to when selling. But, if you want to find out, I'd go to the county recorder's office and take a look at the deed, mortgage, release of mortgage, etc. on file. These documents may have the title company's information, which may be helpful. If you don't remember the purchase price exactly, the county appraiser (or recorder's office) may have the information.

[@yony9591]

Hi Brian, excellent video. My case is a bit different, bought my rental at $30k in 2012. Put it for rent a year later and sold it in 12/2019 for $160k. Never did depreciation, TT never mentioned you must do. 1 - what price do I used for depreciation from purchase to sale 2 - what form do I use to enter this info (sale price - cost basis = gain) Thanks

[@jcman240]

Don't factor depreciation into your cost basis if you never claimed it on previous returns.