As someone that sold my primary residence 2.5 years ago and moved into my former rental, I have a few questions/comments.
I generally get the gist of the depreciation recapture tax, but one thing I haven't heard discussed is the distinction between the value of the property (land) and the value of the house.
My understanding is that the recapture tax only applies to the house as you cannot depreciate the land. So in my case where the neighborhood is in it's final stages of gentrification and the homes value is in the land, I could wind up paying next to nothing in recapture tax because the house has little or no value.
Is this correct?
Sort of correct.
The house value would need to DEPRECIATE at the same rate that you are claiming.
Example
Buy house for $1 million.
1) Land is worth $700k and house worth $300k according to appraisal at time of purchase.
2) Depreciate 4% per year (on a 25 yr cycle... IDK what your depreciation rate is).. 4% x $300k = $12k the first year, $11,500 the second year, etc. (as the home decreases in value, 4%x that value decreases, too).
3) after 2 years you have depreciated $23,500.. On paper the house is values at $276,500 now, down from $300k
4) Sell property and home for $1.1 Million, net of all fees. New Appraisal states that the value is $290k for the home, and $810k for the land.
5) PAY INCOME TAX (at marginal rate, up to your max rate) on recapture of $290k - $276,500 = $3,500k... even though you showed the home dropped in value by $10k when you sold, you had depreciated it by more than that, so you have to pay the overage back in taxes.
6) Pay capital gains tax on ($1.1 Million - $1.0 million).