Depreciation Recapture in Florida: The Tax Bill Rental Owners Meet at Sale
Depreciation recapture Florida rental owners face at sale taxes the deductions they took over the years at a rate up to 25 percent. A 1031 exchange defers it; nothing else avoids it except holding until death.
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Depreciation recapture Florida rental owners meet at sale is the tax on the depreciation deductions taken over the holding period, at a federal rate up to 25 percent.
A 1031 exchange defers it; dying with the property steps it up. Nothing else avoids it. This is general information; a tax professional applies it. Our guide to how to buy a rental property in Florida covers where it starts.
What depreciation is
Residential rental buildings are depreciated over 27.5 years.
The IRS Publication 527 sets the rules.
Land is not depreciated.
Each year's deduction lowers taxable rental income.
It also lowers your basis.
What recapture is
At sale, the gain attributable to depreciation is taxed as unrecaptured section 1250 gain, up to 25 percent.
The rest of the gain is taxed at capital gains rates.
Depreciation you could have claimed is recaptured whether or not you claimed it.
There is no opting out.
The deduction was a deferral, not a gift.
A worked example
A rental held ten years with a building value in the low six figures.
Roughly a third of the building value has been depreciated.
At sale, that amount is taxed up to 25 percent.
The appreciation above the original price is taxed at capital gains rates.
Two taxes on one sale.
Florida's part
None; Florida has no income tax.
Your home state may tax it if you live elsewhere.
See our guide to out-of-state investing in Florida.
Federal tax is the whole bill for Florida residents.
Doc stamps on the deed are a selling cost that reduces gain.
The 1031 exchange
Sell the rental and buy a replacement investment property through a qualified intermediary within the deadlines.
See our guide to 1031 exchanges and mortgages in Florida.
Both recapture and capital gains are deferred.
The basis carries into the new property.
Deferral, not elimination.
Holding until death
Heirs receive a stepped-up basis at the value on the date of death.
See our guide to inherited property with a mortgage in Florida.
Depreciation recapture disappears.
The classic investor endgame: exchange, exchange, then hold.
Estate tax rules apply at high values.
Converting to a residence
Moving into the rental and later selling as a primary residence excludes some gain.
See our guide to capital gains on a primary residence in Florida.
Recapture still applies to the depreciation taken.
The exclusion covers appreciation, not recapture.
A partial answer.
Cost segregation
Accelerating depreciation on components shortens the deduction timeline.
See our guide to 1031 exchanges and mortgages in Florida.
More deduction now, more recapture later, some at ordinary rates.
Useful for high earners who plan to exchange.
Run the numbers with a CPA.
Refinancing and recapture
A cash-out refinance is not a sale; no recapture.
See our guide to cash-out refinance rates in Florida.
Investors pull equity by refinancing instead of selling.
See our guide to the BRRRR method in Florida.
The loan is not income.
Selling at a loss
A sale below adjusted basis produces a loss, not recapture.
Adjusted basis is purchase price plus improvements minus depreciation.
Florida values make losses rare now.
Losses on rentals are deductible with limits.
The depreciation still lowered the basis.
Short-term rentals
Furnishings depreciate faster than the building and recapture at ordinary rates.
See our guide to long-term versus short-term rentals in Florida.
Selling with the furniture complicates the allocation.
Separate the personal property in the contract.
A CPA handles the split.
Instalment sales
Seller financing spreads capital gain over the payments.
See our guide to wraparound mortgages in Florida.
Recapture is generally due in the year of sale regardless.
The instalment method does not defer it.
Plan the cash for it.
Reporting
Form 4797 for the sale of business property; Schedule D for the capital gain portion.
The closing statement and the depreciation schedule are the inputs.
See our guide to tax transcripts and your mortgage in Florida.
Lenders read the returns after a sale for the next loan.
A clean filing helps the next purchase.
Lenders and depreciation
Lenders add depreciation back when calculating rental income for qualifying.
See our guide to using rental income to qualify in Florida.
It is a paper deduction, not a cash expense.
That helps the debt-to-income ratio.
The recapture bill later is the trade.
Planning
Decide the exit before you buy: sell and pay, exchange, or hold.
See our guide to cash-on-cash return in Florida.
Track basis and depreciation each year.
Keep improvement receipts.
The recapture bill is knowable years in advance.
Tracking basis every year
Keep a running schedule of purchase price, improvements and depreciation claimed.
Your tax preparer maintains the depreciation schedule; keep your own copy.
Improvements raise basis and reduce the eventual gain.
Lost receipts mean lost basis.
The schedule is the input to every exit calculation.
Where to start
Pull your depreciation schedule and estimate the accumulated amount.
Multiply by 25 percent for the ceiling on the recapture bill.
Then start a conversation about a refinance or exchange purchase, and a CPA about the sale.