Understanding Depreciation Recapture When Selling a San Diego Rental Property at a Loss

This guide explores depreciation recapture, how it affects rental property losses, and what alternatives you have to avoid unnecessary tax burdens.

What Is Depreciation Recapture?

To understand depreciation recapture, it’s important to first define depreciation. Depreciation is an annual tax deduction that allows you to recover the cost of your rental property over time, effectively reducing your taxable income.

Depreciation recapture is a tax rule that applies when you sell your San Diego rental property. It requires you to pay taxes on the depreciation deductions you claimed over the years, even if you sold the property for a loss. The depreciation recapture tax is calculated based on the difference between the property’s sale price and its adjusted tax basis.

When you sell your rental property at a loss, you must report depreciation recapture and any profits from the sale on IRS Form 4797.

How Depreciation Recapture Affects Rental Property Losses

Depreciation helps reduce taxable income while you own the property. However, upon selling your property, you may need to repay a portion—or all—of the depreciation through depreciation recapture taxes.

Additionally, any gain from depreciation recapture is taxed as ordinary income, not as a capital gain. The maximum depreciation recapture tax rate is 25%, which can result in an unexpected tax bill for property owners.

Example Scenario:

Imagine you own a rental property and claimed $5,000 in depreciation over time, reducing your taxable net income. Later, due to rising repair costs and tenant issues, you decide to sell the property. Although you incur a $3,000 capital loss, you still owe up to $1,250 in depreciation recapture taxes (25% of $5,000).

Even when facing a loss, the IRS requires you to pay taxes on previously claimed depreciation. This is why many property owners experience financial strain when selling rental properties.

Sell Your San Diego Rental Property for a Fair Price

Depreciation recapture can make selling a rental property at a loss more costly than expected. If you want to avoid the hassle of navigating tax complications and ensure a fair price, XLNC Exotic Homes offers a simple, fast, and stress-free solution.

At XLNC Exotic Homes, we purchase properties in any condition—no repairs, no fees, and no waiting. Whether you are dealing with tenant issues, structural damage, or urgent financial needs, we provide competitive cash offers so you can sell your property quickly and move forward with confidence.

Get a Free Cash Offer Today

Skip the lengthy selling process and eliminate the stress of depreciation recapture. Contact XLNC Exotic Homes today and receive an instant, no-obligation cash offer for your San Diego rental property. Simply fill out our form, and we’ll review your property to provide the best possible price.

Let us help you sell your house fast and hassle-free!