Use a Like-Kind Exchange
A like-kind exchange (also known as a 1031 exchange) allows you to defer depreciation recapture by reinvesting the proceeds from the sale of an asset into a similar one. This strategy works for real estate and some business assets. By exchanging the asset rather than selling it outright, you postpone paying taxes on any capital gains or depreciation recapture until you sell the new asset.
Offsetting with Other Losses
You may be able to offset depreciation recapture by using other capital losses from your portfolio. If you have investments that have incurred losses, those losses can reduce your taxable income, potentially lowering the amount of depreciation recapture you owe.
Consult with a Tax Professional
Given the complexity of depreciation recapture rules, working with a tax professional is highly recommended. They can help identify tax-saving strategies tailored to your situation, such as using a like-kind exchange or properly timing the sale of assets.
Final Advice
While depreciation recapture is an inevitable part of selling depreciated assets, strategies like the 1031 exchange and offsetting losses can help reduce its immediate impact. Be sure to consult a tax professional to understand your best options for deferring or minimizing the recapture tax.
