How Tax Reform Affects Depreciation Recapture and Rental Property Sales (2024 Update)

The world has changed landscape lately, particularly when talking about real estate investment, especially rental properties. It’s a balance situation between income generation and tax implications. Tax reforms and restructuring have significantly affected this stance and outlook. 

Depreciation recapture is a crucial centre point where all investors need to bring their attention so that the 2024 US Tax Landscape can be managed positively. This article will give you a brief overview of how taxation influences depreciation recapture and rental property sales.

Understanding Depreciation Recapture

Depreciation is a valuable tax benefit for rental property owners. It enables them to reduce their taxable income each year by deducting a portion of the property’s cost over its estimated useful life. However, there is a glitch, when a property is sold, it lets the investors get back its depreciation amount, or, in other words, a depreciation recapture. 

In such a case, the portion of the gain from the sale is taxed as ordinary income, generally at a higher rate than capital gains.

Tax Reform’s Impact

Although it is a fact that Tax reforms have not directly changed the fundamental concept of depreciation recapture,. However, some facts need to be considered in the context of 2024 tax laws:

1. Tax Rates: While 2017 tax law changed individual income tax brackets, the top capital gains tax rate for long-term assets (held over a year) is now 15% (in 2024), for most taxpayers. However, it can be 0% or 20% for higher earners.
2. Standard Deduction increase: As long as the standard deduction increases, it has substantially increased in recent years. This is purely relevant for smaller-scale rental property owners. If your total listed deductions, including depreciation recapture, fall below the standard deduction, there will be no tax benefit.

Strategies to Minimize Depreciation Recapture

As tax reforms and restructuring have affected a lot, there are still numerous strategies that minimize the impact of depreciation recapture on the rental property sale.

• Hold onto Property: If you hold the property for a long time, it is highly likely that more depreciation can be claimed. It will reduce the taxable income throughout ownership. In addition, properties are highly likely to appreciate over time, which tends to offset the depreciation recapture with a larger capital gain taxed at a potentially lower rate.
• Maximize Depreciation Deductions: How you can maximize your depreciation deductions is important to understand. The allowable depreciation deductions on a rental property are favourable. However, this must be discussed and consulted with a professional tax advisor for a better outcome.
• 1031 Exchange: With regards to Section 1031 Exchange, it permits you to defer capital gains recognition by reinvesting the sale proceeds from your rental property into another “like-kind” property. However, there are strict rules and regulations for a successful 1031 exchange; therefore, a tax professional opinion is quite essential.
• Focus on Long-Term Gains: To lower capital gains tax rates, you should strategically plan your rental property sales. If you hold the property for more than one year before selling, it will be considered a long-term gain and hence taxed at lower rates than short-term gains.

Conclusion:

Tax reforms, although they have tweaked the rules, still hold a significant place in executing rental property sales. By seeking assistance from a tax expert like Dimovtax.com, you can easily find a solution to minimize the tax burden and maximize the return, particularly when it’s time to sell your investment property.