👋How Does Depreciation Affect My Tax When I Sell?
The IRS requires that you reduce your property’s basis by the amount of depreciation that was either:
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Allowed (what you actually claimed), or
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Allowable (what you were entitled to claim)
👉 Whichever is greater
Even if you did not claim depreciation, the IRS still requires you to reduce your basis as if you had.
⚠️ Why This Matters
This rule often surprises foreign sellers.
What may appear to be little or no taxable gain can actually result in a significant taxable gain due to depreciation adjustments.
🧾 Simple Example
Let’s say:
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Purchase price: $500,000
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Sale price: $550,000
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Selling expenses: $50,000
At first glance, it may seem like there is no taxable gain.
However…
📉 Depreciation Adjustment
Assume:
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Residential property (27.5-year depreciation)
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Owned for 10 years
Annual depreciation: ~$18,182
Total depreciation over 10 years: ~$181,820
📊 Adjusted Basis Calculation
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Original basis: $500,000
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Less depreciation: $181,820
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Adjusted basis: $318,180
💥 Result
Even if you sell for $500,000:
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You now have a taxable gain of ~$181,820
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A portion of this is subject to depreciation recapture tax
⚠️ Bottom Line
Depreciation can create a taxable gain—even when it appears there is none.
Proper calculation is critical to:
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Accurately estimate tax liability
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Avoid surprises at closing
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Plan for withholding and refund strategies