Say you have 150k in LTCG, and 50k is attributable to depreciation. You pay tax on 50k as ordinary income in addition to your salary. 150k-50k =100k is the remaining capital gain. My question is, the whole 150k capital gain or just the remaining 100k capital gain added to your salary for purposes of determining your LTCG tax brackets. It seems like even though you're paying regular tax on depreciation recapture, it can also bump up the amount of capital gain in excess of the 0% LTCP tax bracket – and that seems like a sort of double tax. Can someone clarify please? Thanks!
Calculating Long Term Capital Gains Tax when also needing to pay depreciation recapture?
byu/Bartleby11 intax
Posted by Bartleby11
4 Comments
Calculate your taxable income without the long-term capital gains and any qualified dividends. That’s where you start in the capital gains tax brackets.
The whole $150k is capital gains, it will just be divided into different tax rate. If you have any capital losses it will apply to the capital gains taxed at the highest rate.
> It seems like even though you’re paying regular tax on depreciation recapture
Yes, that’s how it works. If you sell stuff for profit then you have to pay tax on that profit, right? So with depreciation you’re saying that you’re going to use that thing up until it’s completely gone and thus you shouldn’t have to pay tax on it because it’s a necessary supply; it’s an expense, there’s nothing related to profit in there.
But if it turns out you were wrong (for whatever reason), if you really did end up getting profit out of it then you have to pay tax on that profit. And this is what depreciation recapture is. It’s where it turns out there really was profit (for whatever reason) and thus you have to include that profit in your income.
So, yes, depreciation recapture is not really related to long-term capital gains or capital gains tax because that money goes straight into your ordinary income. And then after you’ve calculated your ordinary income then you move on to calculating your capital gains tax.
It’s basically 3 layers. The bottom layer is regular income. The middle layer is $50k depreciation recapture, which is taxed like regular income but capped at 25%. The top layer is the remaining $100k of LTCG, which have their own brackets. You can go through the [Schedule D Tax Worksheet](https://www.irs.gov/instructions/i1040sd#en_US_2024_publink24331id0e1675) for the full calculation.