The short answer is no. Unused depreciation doesn't become a deduction when you sell a rental property. But like most real estate tax topics, there's quite a bit more to the story.
For starters, when you sell a rental property, there are two types of taxes you (potentially) have to worry about -- capital gains and depreciation recapture. Capital gains tax is assessed on the difference between your net sale proceeds and your cost basis in the property (including any capital improvements). In other words, if your cost basis in a rental property was $200,000 and you paid $30,000 for a new kitchen, and then sell the property for $300,000, your capital gain would be $70,000. Assuming that you owned the property for more than a year, your capital gain will be treated as a long-term gain, which gets a tax rate of 0%, 15%, or 20%, depending on your income level.
Depreciation recapture tax is assessed on all of those depreciation deductions you've taken over the years and is assessed at a flat 25% rate under current tax law.
Continuing the previous example, let's say that you had taken $20,000 of depreciation on the property, as well as $2,000 of depreciation on the new kitchen. This $22,000 cumulative tax deduction would then be taxable at 25%.
Depreciation is often thought of as one of the best tax advantages of real estate investing, but you're really just "borrowing" the deduction from the IRS. Upon a profitable sale of the property, the IRS wants its money back. Technically, depreciation recapture applies to all types of depreciable assets, but most tend to lose value over time and aren't sold for a profit. On the other hand, real estate is a rare example of a depreciable asset that typically increases in value over time.
In a nutshell, because of the combination of those two types of taxes, selling rental property can be a highly taxable event, especially if you've owned it for some time and have taken a lot of depreciation. So, getting back to your question, your unused depreciation can help your tax bill upon selling by keeping the depreciation recapture portion lower than if you had depreciated the entire cost.
The best way to avoid taxes on a real estate sale is to roll the sale proceeds into another rental property through a process known as a 1031 exchange. In a nutshell, if you buy a property for a purchase price (and with a mortgage) equal or greater to the sale price of your current rental property, you can roll your cost basis into the new property and defer taxes.
As a final note, I am a real estate investor who knows the real estate portion of the tax code well and am also a Certified Financial Planner. I am not a tax attorney, CPA, or other licensed tax professional, and this should not be taken as personal financial advice. Rental real estate taxation can be quite complex, so if you're confused about anything, I strongly suggest seeking the advice of a licensed professional who can become acquainted with your personal situation.
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