If you’ve owned a rental property in Cincinnati, you may have taken advantage of tax deductions over the years through depreciation. Depreciation allows property owners to reduce their taxable income by spreading the cost of the property over its useful life. However, when it comes time to sell the property, things can get complicated—especially if you’re selling your rental property at a loss.
One important consideration during this process is depreciation recapture. Whether you’ve made a profit or incurred a loss on the sale of your Cincinnati rental property, understanding depreciation recapture is critical. In this blog, we’ll explore what depreciation recapture is, how it works, and how it applies when you sell your rental property at a loss.
At PropertyPal, we buy homes in any condition and can help you navigate the sale of your Cincinnati rental property. Let’s dive into what depreciation recapture means and how it affects your taxes when selling a rental property at a loss.
What is Depreciation Recapture?
Depreciation recapture is a tax provision that requires you to “recapture” or pay taxes on the depreciation deductions you’ve taken over the years when you sell your rental property. While you’ve been able to reduce your taxable income by claiming depreciation on your property, when you sell it, the IRS wants to make sure you’re paying taxes on the depreciation you’ve already deducted.
When selling a rental property, the IRS requires that the amount of depreciation you’ve claimed over the years be added back to your taxable income and taxed as ordinary income. The current depreciation recapture rate is 25%. However, this only applies if you have gained equity or sold the property for a profit.
What Happens if I Sell My Rental Property at a Loss?
You might be wondering how depreciation recapture applies if you sell your rental property in Cincinnati at a loss. Here’s the breakdown:
1. Depreciation Recapture Doesn’t Apply to a Loss
If you sell your rental property at a loss (i.e., you sell it for less than what you paid for it), depreciation recapture typically doesn’t apply. This means you won’t have to pay back the depreciation deductions you’ve taken over the years because the sale didn’t result in a gain. In this case, you may be able to write off the loss against other capital gains or income.
For example, if you bought your rental property for $150,000 and sold it for $130,000, you may be able to use that $20,000 loss to offset other capital gains or taxable income you’ve earned.
2. You Can’t Offset All of the Loss
While depreciation recapture doesn’t apply, the loss itself is not a free pass to offset all taxes. There are limits to how much loss you can deduct, and it may depend on your specific tax situation.
The IRS may allow you to apply this loss to other gains, or even carry the loss over to future tax years, but these rules can be complicated.
How Depreciation Recapture Works if You Sell at a Profit
If you do sell your rental property at a profit in Cincinnati, depreciation recapture will come into play. Here’s how it works:
- Calculate Depreciation Taken: First, you’ll need to determine how much depreciation you’ve deducted over the years. This will be based on the original purchase price of the property (minus the value of land), the improvements made, and the number of years you’ve been claiming depreciation.
- Adjust Your Sale Price: The IRS will require you to report the amount of depreciation you’ve claimed as income when you sell the property. This is done by “recapturing” the depreciation and taxing it as ordinary income at a rate of up to 25%.
For example, if you purchased a rental property for $200,000, and claimed $40,000 in depreciation over the years, the IRS will recapture that $40,000 when you sell, meaning you’ll pay taxes on that $40,000 in addition to any capital gains. - Pay Taxes on Depreciation Recapture: The amount of depreciation recapture is taxed at a maximum rate of 25%, but any additional profit from the sale of the property will be subject to capital gains tax rates, which may be 0%, 15%, or 20% depending on your income and the length of time you owned the property.
How PropertyPal Can Help You Sell Your Cincinnati Rental Property
Selling a rental property can be a complex process, especially when it involves depreciation recapture or if you’re selling at a loss. At PropertyPal, we buy rental properties in any condition and simplify the sale process. Here’s how we can help:
1. We Buy Properties As-Is
Whether your property has appreciated or depreciated in value, we’ll buy it in its current condition. No need for repairs or cleaning before you sell.
2. Fast and Fair Cash Offer
We offer fair, no-obligation cash offers for your rental property, allowing you to quickly close and move on to your next investment or financial goal.
3. No Traditional Selling Hassles
Avoid showings, agent commissions, and months of waiting. We make selling simple and stress-free, providing you with the cash you need without the headache.
4. We Can Close Quickly
With PropertyPal, you can close in as little as 7 days, ensuring you get your cash fast.
Ready to Sell Your Cincinnati Rental Property?
Whether you’re selling due to a change in financial circumstances, downsizing, or simply ready to move on, PropertyPal is here to help. If you’re concerned about depreciation recapture or selling at a loss, we can provide the guidance you need and offer a simple, stress-free process.
Contact us at selltopropertypal.com or give us a call today for a no-obligation cash offer and see how PropertyPal can make the sale of your Cincinnati rental property easy and efficient.