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Question: How Do I Handle Depreciation Recapture?
Answer: If a real estate property was rented or used for business, there may be depreciation recapture on the rented portion.
The software does not calculate depreciation recapture. The software will show all the gain as capital gain. If you wish to reflect the ordinary income from recapture, then do the following:
1. Calculate the amount of depreciation to be recaptured.
2. Determine the percent of the recapture being paid by each party. (This is usually the ownership share, the percent of after-tax proceeds being kept by each party.)
3. For each person who is paying recapture tax, calculate the difference between the person's ordinary marginal tax rate and capital gains tax rate.
4. Multiply (1) * (2) * (3). This is the incremental tax each party will pay on account of recapture.
5. Enter the amount from (4) as an "other expense" for only the year after the sale (when tax will be paid) as a Living Expense. Label it as "Marginal Recapture Tax."