I’m not a CPA…
but if you’re considering selling a property that you’ve held as a rental, this is something you definitely need to know. First off, let me make the proper disclosure and tell you that I can’t give tax advice.
That said, let me start at the beginning. One of the incredible benefits of holding real estate is the non-cash deductions you get to use to help offset income from the property, specifically, I’m talking about depreciation.
Depreciation is the reduction in value of an asset, in this case your real estate. You can depreciate pretty much everything except the land that your real property sits on that is. The benefit is that the IRS allows you to deduct a portion of that depreciation as an expense each year. While this can be a pretty cool thing while you’re holding your rental property, there’s more to the story when you go to sell it.
The rest of the story is something called Depreciation Recapture. Basically, what this means is that the depreciation you were able to expense while you held the property as a rental, get’s added back (recaptured) when you go to sell the property. This can cause a significant taxable event, and something you really need to understand before you sell it and are not prepared to pay the taxes due.
Since everyone’s situation is different, you really need to consult with a professional knowledgeable in tax law. Otherwise, you might find yourself in owing the IRS a lot of money, and you’re not able to capitalize on your rental property as you may have hoped.
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