Is a House Hack Subject to Recapture Taxes?
People love the tax advantages of real estate. But a lot of house hackers worry whether the property is subject to recapture taxes.
Recapture taxes are taxes you pay on property that you’ve depreciated in the past (though it does get a little bit more complicated than that).
Since you can depreciate a house hack, are you subject to recapture taxes if you eventually sell the property?
Short answer, as with all things taxes: it depends.
Let’s unpack it.
What are Recapture Taxes?
Recapture taxes are a type of tax that the Internal Revenue Service (IRS) imposes when you sell a property for a gain and have claimed certain tax benefits, such as depreciation, on the property.
When you claim depreciation on a property, you are essentially claiming that you’ve “lost” part of the property’s value. This can be a helpful tax benefit, particularly if you own a rental property and are able to claim a large amount of depreciation each year.
However, when you sell the property, the IRS may require you to “recapture” a portion of the depreciation by imposing a special tax on the sale.
That’s because you’re likely claiming a portion of the property that you already said was lost (on paper).
The amount of the recapture tax is based on the amount of depreciation that you claimed on the property.
For example, if you claimed $10,000 in depreciation on a rental property and then sell the property for a gain of $20,000, you’ll likely be required to pay a recapture tax on the $10,000 portion you wrote off.
Note that not all of the gain from the sale of a property will be subject to recapture taxes. The gain is calculated by subtracting the property’s adjusted basis (generally, the purchase price plus any improvements made) from the sale price.
Generally speaking, the portion of the gain that is subject to recapture taxes is the same as the amount of depreciation you claimed.
That said, the remaining portion of the gain may be subject to capital gains taxes, but not recapture taxes.
Whatever the case, it’s important to consult with a tax professional or review the IRS guidelines to determine your specific tax obligations when selling a property.
But what about house hacking?
Do You Have to Pay Recapture Taxes on a House Hack?
Is a house hack property subject to recapture taxes?
Like many tax questions, it depends.
First, it’s important to understand that you often can claim depreciation on a house hack property for tax purposes. The IRS allows you to claim depreciation on the business portion of your property, which is the portion that you rent out to tenants.
Let’s say you depreciated the portion of your property that you rent out to tenants. If you then sell your property for a gain, you’d have to pay recapture taxes on the portion of the gain that represents the depreciation you claimed.
Conclusion: Are There Recapture Taxes on House Hacks?
In summary, whether a house hack property is subject to recapture taxes depends on (1) whether you claimed depreciation while you owned the property, and (2) whether you sold the property above the depreciated the value.
So, if you sell your house hack property for a gain and have claimed depreciation on some portion of the property, you may be subject to recapture taxes on the value you depreciated.
However, there may be exceptions to the recapture rule depending on the specific circumstances of the sale.
As always, it’s important to consult with a tax professional or review the IRS guidelines to determine your specific tax obligations when selling a house hack property.
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