Real Estate Depreciation Information

Taxation of depreciation claimed on real property works as follows:

For a principal residence on which depreciation was taken before May 7, 1997, the gain is not taxable as long as it doesn't go over the $500,000 or $250,0000 threshold.

For a principal residence on which depreciation was taken after May 7, 1997, the amount of gain equal to the depreciation taken is taxed at a maximum 25% rate, because that portion of the gain is not eligible for gain exclusion.

For a rental property or second home on which depreciation was taken either up to or after May 7, 1997, the gain equal to the depreciation taken is taxed at a maximum 25% rate.

Whether the property was a principal residence, rental property or a second home, taking depreciation increases your gain (and potential tax liability) upon sale.

Helpful Hint - If you've been claiming depreciation for a home office or rental unit, be aware that all depreciation after May 6, 1997 is subject to tax when the property is sold. If the home office or rental unit is "under the same roof" (i.e. not a separate unit with a separate entrance), then the entire dwelling qualifies for the $250,000/$500,000 exclusion.  Separate rental units must be allocated a portion of the sales proceeds and thus would be subject to taxation upon sale.

As always check with your tax advisor to make sure that you understand what is allowed and what is going to result in you getting audited.

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