Investor · San Francisco, CA · Member since 2022 · 36 posts · 41 votes
I'm not going pretend that I understand anything about how the tax side of things work, but I was reading this article the other day by Michael Plaks (not sure how to tag people, sorry).
One of the things that caught was the topic of depreciation recapture. Since you will be paying taxes by depreciation recapture, why choose to depreciate at all? Because in a way, if you are depreciating, you are betting that you overall tax owed will be less when it's time for depreciation recapture, right? Besides owing less in taxes, prior to depreciation recapture, is there any advantage for depreciating an asset?
Rental Property Investor / REALTOR® / Property Manager · Gilbert, AZ · Member since 2023 · 385 posts · 421 votes
3y
@Account Closed just type the @ sign and then start typing the name. The IRS is the reason why you need to depreciate, they will make you recapture even if you don't take the depreciation expense, that's the biggest reason, but it's also beneficial because of inflation, the future money you are paying the tax with is worth less than today's money, and you never need to pay the recapture if you do a 1031 exchange and just kick the can down the road until you die and then your kids will get a step up in basis. If you need capital you should do a cash out refinance instead of selling, it's tax free money and you still own the asset, it adds leverage and gives you liquidity.
Rental Property Investor / REALTOR® / Property Manager · Gilbert, AZ · Member since 2023 · 385 posts · 421 votes
3y
@Account Closed just type the @ sign and then start typing the name. The IRS is the reason why you need to depreciate, they will make you recapture even if you don't take the depreciation expense, that's the biggest reason, but it's also beneficial because of inflation, the future money you are paying the tax with is worth less than today's money, and you never need to pay the recapture if you do a 1031 exchange and just kick the can down the road until you die and then your kids will get a step up in basis. If you need capital you should do a cash out refinance instead of selling, it's tax free money and you still own the asset, it adds leverage and gives you liquidity.
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
3y
Quote from @Account Closed:
I'm not going pretend that I understand anything about how the tax side of things work, but I was reading this article the other day by Michael Plaks (not sure how to tag people, sorry).
One of the things that caught was the topic of depreciation recapture. Since you will be paying taxes by depreciation recapture, why choose to depreciate at all? Because in a way, if you are depreciating, you are betting that you overall tax owed will be less when it's time for depreciation recapture, right? Besides owing less in taxes, prior to depreciation recapture, is there any advantage for depreciating an asset?
Ironically, my article that you linked specifically answers your question, under "Myth 4", and I'll copy-paste the answer:
We may try to debate whether taking depreciation is required by law. What is not debatable however is that we are required by law to take depreciation recapture. And we're required to take depreciation recapture whether or not we took depreciation prior to that! Huh?
Illustration. I offer you $100 as a loan for a week. You say - no thanks, I'm good. I say - no problem, it's up to you whether you accept my $100 or not. But one week from now, I'm coming to collect $100 from you either way. And I'm saying it in Tony Soprano's accent. Are you taking my $100 now?
This is how depreciation works, too. Skip on it if you wish, but Uncle Sam/Tony will collect depreciation recapture from you either way. So better think it through.
In short: it is NOT optional, you cannot "choose" to forego depreciation.
Besides, @Josh Young added a few reasons of why depreciation can be beneficial, even with depreciation recapture.
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
3y
@Account Closed, money today is worth MORE than money in the future! So, KEEPing that money and not paying it in taxes allows you to put that money to use (invest it) and let it grow.
This is the same thing that makes traditional 401k and IRAs powerful because they defer taxes and let all those gains keep compounding for many many years. You eventually pay the tax man on the back end.
Also, you don't have to recapture! If you die, your heirs inherit the property at the stepped up basis (current market value) and nobody pays the depreciation recapture!
In addition, the depreciation happens whether you take the deduction or not. It isn't an option to "not depreciate" on your taxes to avoid the recapture.
Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
3y
Hey @Account Closed I would rather pay $1000 in 10 years than I would now. I would probably even be ok with paying $1500 in ten year instead of paying $1000 now.
Take the depreciation, keep the property for 10+ years or forever.