What Happens If You Sell Before Fixing It?
- Rich Arzaga
- 2 days ago
- 4 min read
Once Escrow Closes, Some Options Close With It
By Rich Arzaga, CFP®, CCIM, The Real Estate Whisperer®
When depreciation issues are discovered, some investors assume they can “figure it out later.”
After all, it’s math.
If there’s a cost, it may be just interest.
Maybe it’s manageable.
That’s a reasonable instinct.
But when someone tells me they’re already under contract, I usually ask a simple question:
“Are you aware there may be a planning hurdle to resolve after this transaction closes?”
The close of escrow represents finality.
All chips are cashed. The transaction is done.
It’s not the end of the world.
But it is often the end of options — both known and unknown.
If you’re not sure how missed depreciation works — including why recapture applies even if it wasn’t taken — it’s worth reviewing the foundation first.
What Changes Once Escrow Closes?
Before a sale closes, you still have flexibility.
You can:
Review compliance issues.
Model potential tax outcomes.
Align depreciation corrections with the gain.
Evaluate installment strategies.
Consider exchange structures.
Coordinate with other income events.
After closing, several things become fixed:
The tax year of gain recognition
The character of income (capital gain vs. depreciation recapture)
Eligibility for exchange treatment
The timing of Medicare lookback impact
The release (or loss) of suspended passive activity losses
Taxes become due when they are due.
Election deadlines pass.
Exchange windows become immovable.
Planning shifts from proactive to reactive.
Once escrow closes, tax planning shifts from proactive to reactive.
What Flexibility Disappears?
If missed depreciation hasn’t been corrected before sale, you lose leverage.
You may still be able to correct compliance after the fact — but the ability to pair that correction strategically with the gain often disappears.
That matters.
Because once the gain is triggered:
You can’t retroactively align the deduction with the income.
You can’t re-time marginal bracket management.
You can’t soften an Income-Related Monthly Adjustment Amount (IRMAA) threshold that has already been crossed.
You can’t coordinate a Roth conversion window that has passed.
Planning works best before income is triggered.
In some situations, a well-timed correction can create meaningful planning opportunities—particularly when coordinated with retirement transitions, liquidity events, or Roth conversions. That coordination only works before the income is fixed.
Afterward, flexibility shrinks.
Not a catastrophe.
But not the best possible outcome.
Planning works best before income is triggered.
What Becomes Irreversible?
Once a gain is recognized, it cannot be unrecognized.
Once depreciation recapture is calculated, it cannot be unwound retroactively (outside of strategies that must be structured before sale).
If cost segregation was involved and income is high, recapture may be taxed at rates exceeding 25% due to marginal bracket stacking.
Once the tax year closes:
Elections are missed.
Timing is fixed.
Marginal brackets are locked.
Medicare lookback is triggered.
Irreversible doesn’t mean disastrous.
It means certain doors are closed.
The Behavioral Side of It
Why do investors wait?
Procrastination.
Optimism.
Overconfidence.
Assuming the professionals have it handled.
Or simply being consumed by the momentum of the transaction.
Real estate transactions move quickly.
Tax strategy does not.
The emotional urgency to close can crowd out thoughtful planning.
And sometimes, the sale becomes the focus — not the after-tax outcome.
The Planning Contrast
Planning before listing may not feel exciting.
It feels slower.
Less urgent.
Less transactional.
But it creates alignment.
When planning happens early, conversations shift from reaction to strategy.
You can illustrate and review potential outcomes.
Compare scenarios.
Evaluate tax timing.
Coordinate retirement decisions.
Integrate Roth conversions.
Manage IRMAA exposure.
Before sale = alignment.
After sale = reaction.
Controlled Urgency
Waiting can feel harmless.
But real estate exits are rarely isolated events. They often intersect with:
Retirement timing
Medicare enrollment
Liquidity events
Roth conversion windows
Long-term tax rate management
The right time to evaluate depreciation isn’t after closing.
It’s before listing.
The right time to evaluate depreciation isn’t after closing — it’s before listing.
The earlier an exit is reviewed, the more strategic it becomes.
FAQ
What happens if I sell rental property without fixing missed depreciation?
You may still be able to correct compliance afterward, but you often lose the ability to strategically pair the correction with the gain from the sale. Timing flexibility shrinks significantly.
Can I correct depreciation after selling the property?
Yes, in many cases, compliance can still be addressed. However, strategic income-alignment opportunities may no longer be available once the sale is complete.
Does selling limit my tax planning options?
Yes. Once gain is recognized, certain elections, timing strategies, and coordination opportunities become fixed or unavailable.
Can I still file Form 3115 after a sale?
In many cases, yes — but the ability to align that adjustment strategically with the sale income may be limited.
Does depreciation recapture change if I never took depreciation?
No. The IRS calculates recapture based on “allowed or allowable” depreciation, even if it was never claimed.
Authored by Rich Arzaga, CFP®, CCIM, Founder, The Real Estate Whisperer® Financial Planning. Helping clients and advisors integrate real estate into holistic financial plans.
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