Depreciation Recapture Planning

Depreciation recapture often makes investors uneasy (refers to the taxation of the gain that arises when the sale price of an asset exceeds its depreciated value.)

Why? Because you're paying taxes on the depreciation when you sell the property.

But don't lose sight of the time value of money!

Example, an investor saves $10,000 in taxes with depreciation deductions and reinvests the savings at an 8% compound return for 10 years. The investment grows to $21,500. The investor receives $11,500 in growth using money that otherwise would have been paid in taxes.

Also, consider the strategies below to minimize and potentially eliminate recapture when selling:

1. Strategic Acquisitions and Dispositions of Properties:

Strategically plan asset acquisitions and dispositions to minimize tax liabilities and maximize returns. Proper tax planning can help optimize cash flow and provide additional funds for reinvestment or expansion.

2. Capital Gains Treatment / Tax Loss Harvesting:

Depreciation recapture is subject to capital gains tax rates, which are often lower than ordinary income tax rates. By carefully structuring asset transactions through proper tax planning, taxpayers can take advantage of these lower tax rates.

Also, strategically selling investments poor performing assets can reduce your overall tax burden by reducing your overall capital gains in that tax year, thereby limiting or eliminating the amount of depreciation recuperation taxes you pay!

?3. 1031 Exchange and Like-Kind Property:

This exit strategy often allows you to defer depreciation recapture and capital gains when you sell your property and use the proceeds to acquire another property. And if you use 1031 exchanges throughout your life, your heirs can receive the property at the fair market value at the date of your death - eliminating depreciation recapture and capital gains tax.

4. Proactive Tax Planning:

By anticipating depreciation recapture taxes ahead of time, you can avoid a hefty tax bill and enjoy the benefits of real estate investing. Before you sell your rental, review these options and consider whether offloading other investments, turning your rental into your primary residence, or purchasing another property aligns with your financial goals.?

5. Seek Professional Guidance:

An experienced financial advisor or tax professional can help review strategies to manage your tax burden. Whether you currently have a property you want to sell or want to review your options for future investing, you can set up a call with the Wathen Lobel Miller Schultz Group to develop a strategy today.

Questions? Contact us for a FREE, NO OBLIGATION 20-Minute Ask Anything Session. ? Schedule yours today!