Question 1

What is recapture in real estate and tax law?

Accepted Answer

Recapture is the recovery by the government of previously granted tax benefits when the conditions for those benefits are no longer met. Common types: depreciation recapture (when a property is sold for more than its depreciated value, the IRS "recaptures" the depreciation deductions; Section 1250), tax credit recapture (if a property receiving historic or low-income housing tax credits is sold or converted before the compliance period ends, the credits are recaptured), and homestead recapture (in some contexts: when a property loses its homestead exemption, back taxes may be assessed).

Question 2

How does depreciation recapture work?

Accepted Answer

Depreciation recapture: when real property is sold: the portion of the gain attributable to depreciation deductions is taxed at a higher rate. Unrecaptured Section 1250 gain: for real property, the depreciation recapture is taxed at a maximum rate of 25% (rather than the lower capital gains rate of 15-20%). Example: if a property was purchased for $500,000, depreciated by $100,000 (to a basis of $400,000), and sold for $600,000: the first $100,000 of gain (the depreciation amount) is taxed at up to 25%, and the remaining $100,000 is taxed at the capital gains rate.

Question 3

What triggers tax credit recapture in Florida?

Accepted Answer

Triggers: Historic Tax Credits (if the property is sold, converted to a non-qualifying use, or substantially altered within 5 years of the credit), Low-Income Housing Tax Credits (LIHTC: if the property fails to maintain the required affordable housing units during the 15-year compliance period), and New Markets Tax Credits (if the qualified equity investment is redeemed within 7 years). Recapture amount: varies depending on how soon after the credit was claimed the triggering event occurs (usually prorated over the compliance period).

Recapture

Recapture in Real Estate and Tax Law

Depreciation Recapture

Tax Credit Recapture

Homestead

Related Terms

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