Depreciation recapture - a losing proposition?
Most of the articles that I've read assume that capital depreciation is deducted from current year income at 25%, or deferred in the case of someone with too high of an AGI to deduct real estate losses. In my situation, I have a low income (15% marginal tax rate), so that means that I am only able to deduct that depreciation at 15%, but when I sell, I have to recapture the capital gains and pay a 25% rate.
For a simple scenario, let's assume I bought the house and 20 years later I sell it for the same price - to mean, it's a wash. But, if I had to depreciate the house $1000 a year each of 20 years and deducted that from my income at a marginal rate of 15%, I'd have saved paying taxes of $1000*0.15*20yrs=$3000. Now when I sell the house, even though I've made no profit, I have to add in the $20000 in recaptured capital gains and pay 25% on that, so I pay $5000 in capital gains. This nets me a loss of $2000 on a wash sale. Am I missing something? It seems like the IRS is assuming that rental property owners must be in the 25% marginal tax rate, and I'm getting a raw deal.