 # Recaptured Depreciation

is equal to depr. taken in anticipation of a decline in the value of the asset, which ultimately did not materialize. It’s from the Real Estate Inv. Analysis section. Are there any RE guys here that can explain why it’s subtracted from the realized gain on the property when calculating capital gains taxes? Shouldn’t it be added to the realized gain since it never materialized? There’s also an example on this on pg. 336 in Schweser Book 4.

My bad, should have used the search function first. Was explained pretty well earlier.

The effect is eventually there, the only reason it is subtracted in the first instance is to tax it at a different rate than capital gains tax rate. Comments… Anish

I think the way they do it is too confusing. You don’t actually have to subtract it to get the capital gain tax. Following on page 336: Net selling price: 795,716 Purchase Price: 577,500 Gain: 218,216 X 20% Tax = 43,643 pls tax on recatured depr: .25*7200 = 18,000 So I never added or subtracted depr from anything and got the same answer. Can anyone explain why we should do it this simpler way?

Accounting-wise you would probably end up in a mess if you don’t include depreciation (recaptured & accumulated) in your calculations. But I agree with you, Smarshy, it’s more straightforward. Only problem you have is when you sell your property at a loss, then you would arrive at different realized gains on the sale (zero vs negative), probably resulting in no loss carry forwards vs loss carry forwards. But I’m no tax expert. I try to remember that you would pay too much capital gains tax if you don’t subtract recaptured depreciation from your realized gain in the end again, because the book value of your property is lowered by accumulated depreciation, in effect increasing your tax burden, but the depreciation never really materialized in the first place.

Two examples: 1) purchase price: 100,000 depreciated over 10 years after 2 years BV 80,000 sold for 90,000 capital gain = 0 because 90,000 < 100,000 though accumulated depreciation is 100,000-80,000 = 20,000 part of it should be recaptured: recaptured depreciation = 10,000 (100,000-90,000) tax = 10,000*(tax rate for recaptured depreciation) Cash Flow = 90,000-tax 2) purchase price: 100,000 depreciated over 10 years after 2 years BV 80,000 sold for 110,000 capital gain = 110,000-100,000 tax1 = tax on capital gain = 10,000*(tax on capital gain) accumulated depreciation is 100,000-80,000 = 20,000 and all of it is recaptured depreciation tax2 = tax on recaptured depreciation= 10,000*(tax rate for recaptured depreciation) Cash Flow = 110,000-tax1-tax2

maratikus Wrote: ------------------------------------------------------- > Two examples: > > 1) > purchase price: 100,000 depreciated over 10 years > after 2 years BV 80,000 > sold for 90,000 > > capital gain = 0 because 90,000 < 100,000 > though accumulated depreciation is 100,000-80,000 > = 20,000 part of it should be recaptured: > recaptured depreciation = 10,000 > (100,000-90,000) > > tax = 10,000*(tax rate for recaptured > depreciation) > > Cash Flow = 90,000-tax > > 2) purchase price: 100,000 depreciated over 10 > years > > after 2 years BV 80,000 > sold for 110,000 > > capital gain = 110,000-100,000 > tax1 = tax on capital gain = 10,000*(tax on > capital gain) > > accumulated depreciation is 100,000-80,000 = > 20,000 and all of it is recaptured depreciation > > tax2 = tax on recaptured depreciation= 10,000*(tax > rate for recaptured depreciation) > > Cash Flow = 110,000-tax1-tax2 For this one: tax2 = tax on recaptured depreciation= 10,000*(tax > rate for recaptured depreciation) did you mean 20000*(tax rate for recaptured depreciation)??

yes, I meant 20,000

maratikus…you rock…i wish you had tutored me the whole 3 months!

thanks, mumukada. I’ve learned a lot on AF. For example, recaptured depreciation from Niblita, “indirect” method of pension liability from mwvt, emerging markets from GMofDen and Dinesh, all-current vs temporal from cpk. I’ve been tutored here by you along with many others.

we all better freakin pass!!

Mumu, I am sure if we all sit down together and take the exam we will get everything right =) Anish

seriously dude…what happened to the good ole days of “group projects”!! they were BIG when I was at college…