Question: Joe has owned a residential rental real estate property since 1993. He has taken straight-line depreciation, using 27.5 years as the life of the property. He is selling the property in 2024. Does Joe have any potentially ordinary income to report from the gain, or from the gain due to previous depreciation allowed or allowable, known as “depreciation recapture”?
Answer: No. Rental real estate depreciation rates have been mandatorily straight-line since 1987 with residential rentals being depreciated over 27.5 years and commercial property depreciated over 31.5 years or 39 years if placed in service after May 12, 1993. Thus, in nearly all cases, real estate property sold currently was depreciated using straight-line. Therefore, no amount of depreciation is recaptured as §1250 gain, which is taxed at ordinary income rates. However, any gains due to §1250 depreciation are classified as unrecaptured section §1250 gains, which are capped at 25%. Any gains in excess of the unrecaptured section §1250 gains are classified as section §1231 gains.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.