Non-Residential Real Estate
As is the case for residential pre-1987 realty, if you depreciated nonresidential pre-1987 realty using just straight-line depreciation, the tax results if you sell it will be the same as for a sale of post-1986 property, as described above. But if, as was possible, you, at any time, used a declining balance method to depreciate the realty, the gain on sale would be taxed as follows:
gain, to the extent of the full amount of depreciation allowable to the time of sale, would be recaptured as ordinary income, and, thus, taxed at ordinary income rates;
the balance of the gain would be taxed at a rate of 15%.
Example. Assume the same facts as in the Example above, except that the $1.3 million building is a commercial building. The gain is the same, $1,615,750, but would be taxed as follows:
(a) $915,750 (representing all of the depreciation allowable) would be taxed as ordinary income;
(b) $700,000 (the balance of the gain) would be taxed at a rate of 15%.
Pre-1981 property. The following rules apply if you sell real estate placed in service before 1981:
the excess of depreciation claimed over straight-line depreciation is recaptured as ordinary income, and, thus, taxed at ordinary income rates (but the amount of excess depreciation subject to recapture may be less for certain residential real estate or for real estate acquired before 1970).
gain, to the extent of the balance of depreciation allowable, is unrecaptured section 1250 gain, taxed at a rate of 25%.
the balance of the gain, if any, would be taxed at a rate of 15%.
If you have further questions about the above rules or would like us to compute the potential tax that you face, please let us know.