Depreciation Recapture
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For sellers of investment real property, any gain attributable to depreciation is taxed at a minimum rate of 15% and a maximum rate of 25%. By comparison, gains attributable to depreciation taken on assets other than real estate are taxed at the more-favorable 10% and 20% rates. Consequently, the real estate industry is correct when it notes that real estate has been treated unfairly in this regard.
For taxpayers with marginal tax brackets of 28%-and-higher, however, these new rates are preferable to the previous regulations: any gain resulting from straight-line depreciation on real estate was taxed at a maximum rate of 28%; and any gain resulting from accelerated depreciation was taxed at the taxpayer's ordinary marginal tax rates (15 % - 3 9.6 %).
Unlike the tax treatment of a primary residence used partially for business, all depreciation taken on an investment property-even that claimed prior to May 7, 1 1997-must be recaptured and taxed at the 15% and 25% rates.
As before, the tax obligation on depreciation calculated by the straight‑line method may be spread over the term of an installment sale; the total tax obligation on depreciation calculated by the accelerated method, however, is still due in the year of sale, even if the property is sold on an installment basis.
Installment Sales
Installment sale payments received on or after May 7, 1997 are generally eligible for the lower capital gains tax rates of 10% and 20%, even though the sale took place earlier.
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