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I am having some issues figuring out to calculate how depreciation affects my tax for a rental property. I have an example below. Is it correctly calculated correctly?

Example:

  • Purchase price: $1,500,000
  • Rehab: $100,000
  • Land Value: $750,000
  • Year 1 interest paid: $41,632
  • Year 1 principal paid: $23,029
  • Yearly property tax: $18,750
  • Annual expenses: $6,200 (Insurance, utilities, gardener, and so on)
  • Tax rate: 25%
  • The annual rent income is $129,600

The house value is $750,000 (purchase price - land value) + $100,000 in rehab (all just calculated as 27.5 to make it easier), depreciated over 27.5 years is $30,909 a year.

If we calculate our year's profit $129,600 (rent income) + $23,029 (principal) - $6,200 (annual expenses) - $18,750 (property tax) - $41,632 (interest paid) = $86,047

My depreciation is $30,909 a year, I can subtract that from my taxable income. $86,047 - $30,909 = $55,138 I am then taxed on the $55,138 at 25% making this year's tax $13,784.5 That would mean my annual profit is $86,047 - $13,784.5 = $72,262.5 and cash flow $72,262.5 - $23,029 = $49,233.5

Is this correct so far?

Let's say that I hold the property for 10 years and sell it for $1,950,000., meaning that I increase the value of the property by $450,000. And the land value was 50% meaning that the building has increased the value by $225,000.

How do I calculate how the depreciation recapture is taken at this sale?

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