Does depreciation recapture work if you sell within 5 years? Yes, depreciation recapture applies no matter how long you own the property; there is no special exemption for selling a property within five years. Recapture applies to the total amount of depreciation claimed up to the point of sale. Selling a property early, especially within five years, means the personal property (like 5-year assets reclassified through Cost Segregation) will have depreciated significantly, thus triggering higher recapture on that specific portion.
The amount of recapture depends on the type of asset sold. Items categorized as real property (depreciated over 27.5 or 39 years) will have accumulated less depreciation early on, triggering less recapture. However, the accelerated deductions taken on shorter-life assets provide tax savings and enhanced cash flow in those initial years, and the recapture upon sale is simply the final step of the tax process.
Depreciation Recapture on an Early Sale
- Recapture Rule: Depreciation recapture applies no matter how long you own the property; there is no exemption for selling within five years.
- Recapture Amount: The amount of recapture is based on how much depreciation you have claimed by the time of sale.
- Impact of Cost Segregation: Selling early means personal property (5-year items) identified through Cost Segregation will have depreciated significantly, leading to higher recapture on that portion.
- Impact on Real Property: Real property (depreciated over 27.5 or 39 years) accumulates depreciation slowly, so less recapture is triggered early on.
- Tax Status: Recaptured depreciation is typically taxed at the higher ordinary income tax rate (up to 25% for §1250 property) instead of capital gains rates.
