We get a lot of questions on the tax benefits of real estate and the role of depreciation in real estate transactions. This post gives an example of the tax implications of purchasing a single condo, renting it out for 10 years, and then selling it.

For this example we make the following assumptions:


Assume we buy the condo for $500,000. The condo brings in $30,000 in rent each year, and we pay $20,000 a year in expenses. Also let’s assume the condo is worth $400,000 and the land is $100,000. The IRS only allows us to deduct based on the value of the land so in this case, our yearly depreciation is $400,000/29.5 = $13,560.

These are the assumptions upon buying the condo:

Initial property value$500,000
Land value$100,000
Building value$400,000
Annual Depreciation$13,560
Annual Income$10,000
Annual passive loss carryover$3,560

We declare a loss each year, so we won’t have to pay taxes on our income until we sell the property.


Now let’s look at what happens when we sell. We will sell the property after 10 years for $700,000.

These are the assumptions when sold:

Selling Price$700,000
Capital Gain$200,000
Depreciation Recapture$135,600
Total Passive Loss Carryover$35,600

We will have to pay long-term capital gains tax on $200,000. Capital gains tax rates range from 0 to 23%. There are strategies to postpone paying capital gains tax but those are outside the scope of this post.

We also "recapture" $135,600 in depreciation that we've accrued while we've owned the property, meaning that we now have to pay taxes on it. Depreciation recapture tax is capped at 25%. People wonder why they have to pay tax on depreciation since depreciation isn’t income. Here’s how we can break it down:


For our rental condo, we gained three tax benefits:

If you have any questions or comments on this blog post or need a bookkeeper for your small business, contact us at: info@currentlifeventures.com