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Depreciation recapture is a tax provision that requires taxpayers to pay taxes on the depreciation taken on a depreciable asset during the time the taxpayer owned the asset. The sale of the asset generates the tax liability. If you sold business or investment property in 2022 and did not utilize a 1031 exchange, you are likely faced with reporting your depreciation recapture tax owed on your 2022 Tax Return.
How to Report Depreciation Recapture Tax
To report depreciation recapture tax on your annual tax return, you will need to follow these steps:

Calculate the amount of depreciation recapture tax owed on real estate: To do this, you will need to determine the amount of depreciation claimed on the asset during the time that you owned it. The total of all depreciation taken is the amount of gain that is subject to depreciation recapture tax. The federal tax rate for depreciation recapture is 25%. Simple the calculation process by utilizing our Depreciation Calculator.

Complete Form 4797: This form is used to report the sale of business property and the amount of depreciation recapture tax owed. You will need to provide information about the property being sold, including the purchase date, purchase price, and the amount of depreciation claimed. You will also need to calculate the amount of depreciation recapture tax owed and report it on the form.

Transfer the information to your tax return: Once you have completed Form 4797, you will need to transfer the information to your tax return. The amount of depreciation recapture tax owed will be included on your Schedule D (Capital Gains and Losses) and will be subject to the applicable tax rate.

It is important to note that the rules and procedures for reporting depreciation recapture tax may vary depending on the specific circumstances of the sale. It is recommended that you consult with a tax advisor for guidance on how to properly report depreciation recapture tax on your tax return.
Real Property & Beyond: Popular Examples of Assets Subject to Depreciation Recapture Tax
Depreciation recapture tax applies to the sale of real estate as well as other certain types of depreciable assets. Some popular examples of assets subject to depreciation recapture tax include:

Real estate: Buildings, land improvements, and other types of real estate that have been used for business purposes may be subject to depreciation recapture tax.
 
Vehicles: Commercial vehicles, such as trucks and buses, that have been used for business purposes may be subject to depreciation recapture tax.
 
Equipment: Machinery, tools, and other types of equipment that have been used for business purposes may be subject to depreciation recapture tax.
 
Intangible assets: Certain types of intangible assets, such as patents, copyrights, and trademarks, may be subject to depreciation recapture tax.
 
Rental property: Rental properties that have been depreciated over time may be subject to depreciation recapture tax when sold.
 
Partnership interests: Partnerships that have depreciated assets may pass on depreciation recapture tax liability to their partners when those assets are sold.

Defer Depreciation Recapture Tax
If you are reporting Depreciation Recapture Tax on your upcoming annual tax return, it is too late for a 1031 exchange, but for future knowledge a 1031 Exchange allows for the deferral of Depreciation Recapture Tax on the sale of qualifying real estate.
Learn more about your depreciation options in a 1031 Exchange.

Depreciation recapture is a tax provision that requires taxpayers to pay taxes on the depreciation taken on a depreciable asset during the time the taxpayer owned the asset. The sale of the asset generates the tax liability. If you sold business or investment property in 2022 and did not utilize a 1031 exchange, you are likely faced with reporting your depreciation recapture tax owed on your 2022 Tax Return.
How to Report Depreciation Recapture Tax
To report depreciation recapture tax on your annual tax return, you will need to follow these steps:

Calculate the amount of depreciation recapture tax owed on real estate: To do this, you will need to determine the amount of depreciation claimed on the asset during the time that you owned it. The total of all depreciation taken is the amount of gain that is subject to depreciation recapture tax. The federal tax rate for depreciation recapture is 25%. Simple the calculation process by utilizing our Depreciation Calculator.

Complete Form 4797: This form is used to report the sale of business property and the amount of depreciation recapture tax owed. You will need to provide information about the property being sold, including the purchase date, purchase price, and the amount of depreciation claimed. You will also need to calculate the amount of depreciation recapture tax owed and report it on the form.

Transfer the information to your tax return: Once you have completed Form 4797, you will need to transfer the information to your tax return. The amount of depreciation recapture tax owed will be included on your Schedule D (Capital Gains and Losses) and will be subject to the applicable tax rate.

It is important to note that the rules and procedures for reporting depreciation recapture tax may vary depending on the specific circumstances of the sale. It is recommended that you consult with a tax advisor for guidance on how to properly report depreciation recapture tax on your tax return.
Real Property & Beyond: Popular Examples of Assets Subject to Depreciation Recapture Tax
Depreciation recapture tax applies to the sale of real estate as well as other certain types of depreciable assets. Some popular examples of assets subject to depreciation recapture tax include:

Real estate: Buildings, land improvements, and other types of real estate that have been used for business purposes may be subject to depreciation recapture tax.
 
Vehicles: Commercial vehicles, such as trucks and buses, that have been used for business purposes may be subject to depreciation recapture tax.
 
Equipment: Machinery, tools, and other types of equipment that have been used for business purposes may be subject to depreciation recapture tax.
 
Intangible assets: Certain types of intangible assets, such as patents, copyrights, and trademarks, may be subject to depreciation recapture tax.
 
Rental property: Rental properties that have been depreciated over time may be subject to depreciation recapture tax when sold.
 
Partnership interests: Partnerships that have depreciated assets may pass on depreciation recapture tax liability to their partners when those assets are sold.

Defer Depreciation Recapture Tax
If you are reporting Depreciation Recapture Tax on your upcoming annual tax return, it is too late for a 1031 exchange, but for future knowledge a 1031 Exchange allows for the deferral of Depreciation Recapture Tax on the sale of qualifying real estate.
Learn more about your depreciation options in a 1031 Exchange.

Taxpayers often ask whether they can sell their vacation/second homes as part of a 1031 exchange. The short answer is that if the property was used exclusively as a vacation or second home, it cannot be sold as part of a 1031 exchange. There are, however, limited circumstances under which a vacation/second home can be included in a 1031 exchange.
Snapshot of IRC § 1031
First, a quick review of the rules for a valid 1031 exchange. Internal Revenue Code Section 1031 says that when real property that was held for productive use in a trade or business or for investment is exchanged for other real property that will be held for productive use in a trade or business or for investment, the taxpayer does not recognize the capital gains on the sale of the original property. The key words here are “productive use in a trade or business or for investment.” Your vacation home or second home is neither held for productive use in a trade or business nor for investment.
Some might argue that acquiring a vacation/second home is an investment, as the property is expected to appreciate over time. However, a variety of court cases have held that hoping for appreciation on a property that was used exclusively by the taxpayer does not meet the definition of an investment property. Some commentators suggest that an easy way to determine if a property was held for productive use in a trade or business or for investment is to look to see if the property was reflected on Schedule E of the taxpayer’s federal income tax return. Schedule E is used to reflect income from rental real estate, among other things. The argument is that if the property was not reflected on Schedule E, then it is probably not an investment property, and a 1031 exchange involving that property would likely fail on audit.
IRS Guidance on Vacation/Second Homes
The IRS has given us additional guidance regarding vacation/second homes in the form of Revenue Procedure 2008-16. The Service specifically noted that some taxpayers hold property for rental purposes and also make periodic personal use of those properties. The Revenue Procedure specifically provides that the property (a) must have been owned by the taxpayer for at least 24 months prior to the 1031 exchange, (b) during each 12 month period prior to the sale, the property must have been rented for a minimum of 14 days, and (c) the taxpayer’s use of the property must not exceed 14 days, or 10% of the time that it was rented, whichever is greater.
Let’s look at a few scenarios and whether they would qualify for a 1031 Exchange:

A taxpayer has used the properly exclusively as a vacation/second home – it will not qualify under the Revenue Procedure.
A taxpayer rents the property for 14 days but makes personal use of the property for more than 14 days – it will not qualify for 1031 exchange treatment.
A taxpayer rents the property for all of May through August (123 days) and makes personal use of the property for more than 14 days – it will still not qualify for 1031 exchange treatment.
A taxpayer rents the property for all of January through June (180 days) and makes personal use of the property for 17 days – it will qualify for a 1031 exchange, because the taxpayer used the property less than 10% of the time it was rented.

Additionally, it would be prudent that any rental of the property be at fair market value, and that the income from the rent be reflected on the taxpayer’s tax return (Schedule E).
The bottom line is that second homes, or vacation homes, are not considered investment use property solely based upon the hope the property will appreciate and in order for a valid 1031 Exchange certain requirements must be met. Any taxpayers contemplating a 1031 exchange with a vacation/second home should consult with their tax or legal advisors before contacting the 1031 exchange company.

Taxpayers often ask whether they can sell their vacation/second homes as part of a 1031 exchange. The short answer is that if the property was used exclusively as a vacation or second home, it cannot be sold as part of a 1031 exchange. There are, however, limited circumstances under which a vacation/second home can be included in a 1031 exchange.
Snapshot of IRC § 1031
First, a quick review of the rules for a valid 1031 exchange. Internal Revenue Code Section 1031 says that when real property that was held for productive use in a trade or business or for investment is exchanged for other real property that will be held for productive use in a trade or business or for investment, the taxpayer does not recognize the capital gains on the sale of the original property. The key words here are “productive use in a trade or business or for investment.” Your vacation home or second home is neither held for productive use in a trade or business nor for investment.
Some might argue that acquiring a vacation/second home is an investment, as the property is expected to appreciate over time. However, a variety of court cases have held that hoping for appreciation on a property that was used exclusively by the taxpayer does not meet the definition of an investment property. Some commentators suggest that an easy way to determine if a property was held for productive use in a trade or business or for investment is to look to see if the property was reflected on Schedule E of the taxpayer’s federal income tax return. Schedule E is used to reflect income from rental real estate, among other things. The argument is that if the property was not reflected on Schedule E, then it is probably not an investment property, and a 1031 exchange involving that property would likely fail on audit.
IRS Guidance on Vacation/Second Homes
The IRS has given us additional guidance regarding vacation/second homes in the form of Revenue Procedure 2008-16. The Service specifically noted that some taxpayers hold property for rental purposes and also make periodic personal use of those properties. The Revenue Procedure specifically provides that the property (a) must have been owned by the taxpayer for at least 24 months prior to the 1031 exchange, (b) during each 12 month period prior to the sale, the property must have been rented for a minimum of 14 days, and (c) the taxpayer’s use of the property must not exceed 14 days, or 10% of the time that it was rented, whichever is greater.
Let’s look at a few scenarios and whether they would qualify for a 1031 Exchange:

A taxpayer has used the properly exclusively as a vacation/second home – it will not qualify under the Revenue Procedure.
A taxpayer rents the property for 14 days but makes personal use of the property for more than 14 days – it will not qualify for 1031 exchange treatment.
A taxpayer rents the property for all of May through August (123 days) and makes personal use of the property for more than 14 days – it will still not qualify for 1031 exchange treatment.
A taxpayer rents the property for all of January through June (180 days) and makes personal use of the property for 17 days – it will qualify for a 1031 exchange, because the taxpayer used the property less than 10% of the time it was rented.

Additionally, it would be prudent that any rental of the property be at fair market value, and that the income from the rent be reflected on the taxpayer’s tax return (Schedule E).
The bottom line is that second homes, or vacation homes, are not considered investment use property solely based upon the hope the property will appreciate and in order for a valid 1031 Exchange certain requirements must be met. Any taxpayers contemplating a 1031 exchange with a vacation/second home should consult with their tax or legal advisors before contacting the 1031 exchange company.

Taxpayers often ask whether they can sell their vacation/second homes as part of a 1031 exchange. The short answer is that if the property was used exclusively as a vacation or second home, it cannot be sold as part of a 1031 exchange. There are, however, limited circumstances under which a vacation/second home can be included in a 1031 exchange.
Snapshot of IRC § 1031
First, a quick review of the rules for a valid 1031 exchange. Internal Revenue Code Section 1031 says that when real property that was held for productive use in a trade or business or for investment is exchanged for other real property that will be held for productive use in a trade or business or for investment, the taxpayer does not recognize the capital gains on the sale of the original property. The key words here are “productive use in a trade or business or for investment.” Your vacation home or second home is neither held for productive use in a trade or business nor for investment.
Some might argue that acquiring a vacation/second home is an investment, as the property is expected to appreciate over time. However, a variety of court cases have held that hoping for appreciation on a property that was used exclusively by the taxpayer does not meet the definition of an investment property. Some commentators suggest that an easy way to determine if a property was held for productive use in a trade or business or for investment is to look to see if the property was reflected on Schedule E of the taxpayer’s federal income tax return. Schedule E is used to reflect income from rental real estate, among other things. The argument is that if the property was not reflected on Schedule E, then it is probably not an investment property, and a 1031 exchange involving that property would likely fail on audit.
IRS Guidance on Vacation/Second Homes
The IRS has given us additional guidance regarding vacation/second homes in the form of Revenue Procedure 2008-16. The Service specifically noted that some taxpayers hold property for rental purposes and also make periodic personal use of those properties. The Revenue Procedure specifically provides that the property (a) must have been owned by the taxpayer for at least 24 months prior to the 1031 exchange, (b) during each 12 month period prior to the sale, the property must have been rented for a minimum of 14 days, and (c) the taxpayer’s use of the property must not exceed 14 days, or 10% of the time that it was rented, whichever is greater.
Let’s look at a few scenarios and whether they would qualify for a 1031 Exchange:

A taxpayer has used the properly exclusively as a vacation/second home – it will not qualify under the Revenue Procedure.
A taxpayer rents the property for 14 days but makes personal use of the property for more than 14 days – it will not qualify for 1031 exchange treatment.
A taxpayer rents the property for all of May through August (123 days) and makes personal use of the property for more than 14 days – it will still not qualify for 1031 exchange treatment.
A taxpayer rents the property for all of January through June (180 days) and makes personal use of the property for 17 days – it will qualify for a 1031 exchange, because the taxpayer used the property less than 10% of the time it was rented.

Additionally, it would be prudent that any rental of the property be at fair market value, and that the income from the rent be reflected on the taxpayer’s tax return (Schedule E).
The bottom line is that second homes, or vacation homes, are not considered investment use property solely based upon the hope the property will appreciate and in order for a valid 1031 Exchange certain requirements must be met. Any taxpayers contemplating a 1031 exchange with a vacation/second home should consult with their tax or legal advisors before contacting the 1031 exchange company.