Three situations resulting in No Profit, but taxable gain
This post is add-on #1 to my recent newsletter. Information compliments of Julie Tumbaga the Vice President, Hawaii Regaional Manager of Orexco1031
1.Depreciation recapture
If a taxpayer takes depreciation deductions, those deductions reduce the taxpayer's basis, thereby resulting in gain.
e.g.
Taxpayer acquires investment property A for $200,000. Taxpayer's basis is therefore $200,000. During taxpayer's ownership, taxpayer takes $138,500 of depreciation deductions, thereby reducing taxpayer's basis to $61,500. Taxpayer sells Property A for $180,000. Even though taxpayer sells the property for $20,000. less than what he originally purchased it for, he still has a taxable gain of $118,500 ($180,000-$61,500=$118,500) which will result in approximately $41,500 in federal and state taxes. This adverse tax result can be avoided by exchanging the property in a tax deferred exchange rather than selling the property.
