It's that time of year again when I receive and answer many tax questions related to the reporting and tax treatment of 1031 Tax Deferred Exchanges, or this year the "lack" of 1031 Exchanges in many cases, on taxpayers income tax returns.
The Tax Man Cometh and Taketh
This year there are many more questions related to the tax treatment of rental properties because many taxpayers merely sold and cashed out and now have significant income tax liabilities. The one income tax issue involved with rental property that is often misunderstood is depreciation recapture.
Depreciation and Depreciation Recapture
Taking depreciation on your income tax return is mandatory for taxpayers that buy and hold rental or investment property. The depreciation can be indefinitely deferred into the future upon sale of the rental property as long as the taxpayer continues to structure 1031 Exchange transactions.
However, taxpayers must recapture the depreciation and pay taxes on the depreciation previously taken on their rental or investment properties when they sell if they are not structuring a 1031 Tax Deferred Exchange.
This is the reason that we have noticed an increase in depreciation recapture questions during the first part of this tax filing season. So, I thought that I would link to a discussion board post on depreciation recapture that will help explain the issue in greater detail.