Depreciation recapture refers to gains that are associated with disposal of a property whose value has been depreciated for tax purposes.
A significant depreciation recapture is derived when the sale value is significantly higher than the accrued depreciation value. The essence of capturing this depreciation comes as a part of the profit through the reduction of the book value cost.There has been a misunderstanding on the tax rate charged over the depreciation recapture. This difference lies on the method used to calculate depreciation. Straight line method leads to a 25 percent federal tax while any excess on the accelerated method over the straight line method is taxed using normal tax rates (ftec.
com, n d). However, any extra gains accruing from increase in property value due to appreciation is charged at a maximum tax rate of 15 percent.In cases where the property is swapped with another, the gain from the recapture is transferred into the replaced property hence making clearing its tax chargeable at that moment. However, if the property is later sold, the property attracts an equivalent tax on the depreciation recapture. There are chances of where one can afford to defer taxes.
Property exchange therefore stands as a significant way of safe guarding gains which reduces the amount taxable from direct sales.These gains can not however be sustained forever. This is because, in an event of a death of an owner of a given property, the change of ownership changes the state of gains swapped over the life of the owner (ftec. com, n d). This is because, the new owners receives a stepped up tax cost.
However, there is a need to have a correct advice form the tax advisor on cases of change of property ownership through inheritance which can help to realize some capital gains especially for property that exceeds the tax free level.
