Thinking about selling a rental property I've had for about 14

Run it through turbo tax, or ask your accountant. Plan on paying the bill. LOL it is what it is. You could 1031 into another property if that is your goal, but there are rules to do that. (third party holding the money, and a time frame to make the purchase) That only delays the tax bill, it doesn't eliminate. Giving it to your heirs when you die will eliminate a lot of taxes, since they get the stepped up basis. But you have to hold it until then.

When I was looking to sell mine, I made a "test return" in turbo tax (for the previous year) I entered all the information that I thought I have. Saw how much tax I would owe and almost didn't want to go through with it. But I am glad to be rid of that troublesome property and I still came out with money in hand.

You can't escape death and taxes.

Well, the best way to deal with it financially is to die. That way the property conveys to your beneficiary or estate, and the cost basis resets to the current FMV. This is the only way I am aware of to completely eliminate paying the depreciation recapture.

If dying isn't particularly attractive to you, you can execute a 1031 exchange. This means that you buy a new property of "like kind" and sell the current one, and your depreciation on the sold property is deferred while you own and rent out the new property. Eventually (unless you die) you will have to pay all the depreciation on both properties when you sell them.

If you are looking for very creative or clever ways, you should probably contact a tax attorney or investment advisor.

Ah, depreciation! That funny little word based that sprang forth fully grown from a tax accountant's mind.

LindaJ and Martin gave good advice as far as the ways to delay (1031 exchange) or avoid (die) depreciation recapture at sale. I know of no other (legal) way around it. Sure, if the property is has depreciated down to a residual value of $150,000 you could try to pull a fast one and write the contract up for $100,000 to make it look like you took a loss when in reality you sell it for $200,000 via a post-closing Buyer cash kick-back, but that's risky, illegal and unethical, so we won't discuss that.

Aw dang... ;-)

Just kidding, I wouldn't do that, nor advise any one else to. All that to say Uncle Sam will get his pound of flesh unless you die under current tax law.

This next strategy I've never tried, but I got to thinking about it....

What if you could offset some of that depreciation recapture by buying new "fixer" upper property and properly allocating your fix up costs into categories that meet the de minimus safe harbor deduction rule? That could allow you to write off enough in the same year as you sell your current property to create a paper loss that may reduce/eliminate your depreciation recapture liability while in reality boosting the value of your new asset substantially? That would be like a "back door" 1031 exchange because you eventually would end up with the same deferred tax liability when you sell the new property, but you just don't have to mess with the paper work and regulations for the transaction you do today.

Hmmm... this is from 2009 so much has probably changed since then, but it looks like at one time my thought was workable....

****************************

bankrate.com/finance/taxes/figuring-depreciation-recapture.aspx

"Depreciation recapture on real property is nothing more than a specially taxed type of capital gain. As such, it can be offset by capital losses. Real property used in a trade or business or held out for rental is subject to an allowance for depreciation.

Claiming depreciation is not optional; any unclaimed depreciation is still subject to recapture when the property is sold. Recapture basically means that you must take the prior depreciation deductions back into income. Recapture occurs when a property is sold.

Historically, depreciation was recaptured at the same rate that applied to long-term capital gains. When the long-term capital gains rates were slashed to 20 percent, and later to 15 percent in the early years of this decade, a differential rate was established for recapture. Currently, depreciation recapture is taxed at a maximum of 25 percent.

The tax term applied to depreciation recapture on real property under Modified Accelerated Cost Recovery System, or MACRS, is unrecaptured Section 1250 gain. MACRS is the depreciation system that applies to most property placed in service after 1985.

For most taxpayers, the unrecaptured Section 1250 gain is the lesser of the gain on the sale of the property or the amount of depreciation allowed or allowable. For example, assume you bought a property for $500,000 and were allowed $100,000 in depreciation and the property sold for $550,000. Your gain is $150,000, of which $100,000 is from unrecaptured Section 1250 gain.

The recapture on deprecation is 25% of the amount you deprecated. Federal Long Term Capital gains tax is up to 20%.

"What is the best way to deal with those concerns?"

Seek help from your therapist.

Seriously, just pay the tax and move on with your life. Be thankful you made money.

Why COULDN'T you sell the house at a paper loss, though? I'm not tax-savvy enough to know. But is there a balancing act that can be done between purchase price and depreciation? Or do you have to recapture depreciation no matter WHAT price you sell it for?

I believe the only way to avoid it is for a disaster to hit. Named storm which destroys the home, fire, etc. That causes enough damage (loss) to mean no recapture. Of course, you lose a lot that way, too.

Armed with the latest return, you can googlize 1031 financial calculator and get the general idea of what type of tax bill you are trying to delay.