Residential Real Estate
Example. In January 1986, you paid $1.3 million for an apartment building (not a low-income building), of which $1 million was allocated to the improvements. You depreciated the property using the 175% declining balance method. You sold the property in July 2003 for $2 million. From 1986 through 2003, a total of $915,750 in depreciation was claimed. Assuming the only adjustment to basis was for depreciation, there would be a gain of $1,615,750 ($2 million less remaining basis of $384,250), taxed as follows:
(a) $19,583 (the excess of $915,750 depreciation claimed over $896,167 that would have been allowable using straight-line depreciation) would be taxed as ordinary income;
(b) $896,167 (the depreciation that isn't recaptured as ordinary income under (a)) would be taxed at a rate of 25%;
(c) $700,000 (total gain less amounts in (a) and (b)) would be taxed at a rate of 15%.