2022 Tax file question for Rental Property Depreciation

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2022 Tax file question for Rental Property Depreciation

Kevin Kim

Member since 2020 · 69 posts · 12 votes

Hello

I have 3 rental properties and want to double check for depreciation best practices.

Rental 1 Net income : -13,500 (Due to a lot of repair/renovation)

Rental 2 Net income : 6,000

Rental 3: 3,000

So i thought, I don't have to use "depreciation" since my all total rental income was negative (-,4.500) (I don't want to pay a lot of capital gain taxes when i sell my home although 1031 exchange is possible...)

But my CPA says this year negative loss (-4,500) will be carry over. Eventually, if i sell the rental home, I can use the carried over loss to deduct capital gain. My CPA recommends to use depreciation every year as even if there will be negative rental income (due to depreciation), it will carry over.

I am in new this rental business and appreciate if someone can advise best practice for depreciation.

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Sean O'KeefePro Member

CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes

@Kevin Kim Depreciation is required by the IRS once you've "Placed the property in service" (this is when you've made the property ready and available, not necessarily when you have a tenant occupy the property).

Yes, unused losses may get carried forward to future years and offset capital gains on sale, but keep in mind there is also depreciation recapture.

If you "materially participate" in the property you may be able to offset W-2 income with losses from rental property, but this depends on a # of factors including type of rental (STR, LTR, etc), level of taxable income, and more.

Sounds like you might want to explore some tax planning to understand this better and get more insights specific to your situation.
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*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.

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Sean O'KeefePro Member
CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes
3y
@Kevin Kim Depreciation is required by the IRS once you've "Placed the property in service" (this is when you've made the property ready and available, not necessarily when you have a tenant occupy the property).

Yes, unused losses may get carried forward to future years and offset capital gains on sale, but keep in mind there is also depreciation recapture.
If you "materially participate" in the property you may be able to offset W-2 income with losses from rental property, but this depends on a # of factors including type of rental (STR, LTR, etc), level of taxable income, and more.

Sounds like you might want to explore some tax planning to understand this better and get more insights specific to your situation.
.
.
*This post does not create a CPA-client relationship. The information contained in this post is not to be relied upon. Readers are advised to seek professional advice.
[email protected]628-241-0888
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John Malone
Attorney · Boston, MA · Member since 2023 · 140 posts · 75 votes
3y
@Kevin Kim keep in mind depreciation is mandatory, not optional.
The law is “allowed or allowable”. If you don’t take it you’ll still get hit with recapture
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
3y
Taking depreciation is not an option but a requirement.

Furthermore, why wouldn't you want to take it.
The loss in excess of income either offsets your W-2 income or is carried forward and used when you sell the house.

Depreciation recapture is taxed at a minimum of 25%, however, the rental loss or suspended rental loss can be used to offset income at the highest tax rate.
[email protected]917-280-8544
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Eric Williams
Accountant · Houston, TX · Member since 2023 · 148 posts · 41 votes
3y
Quote from @Kevin Kim:

Hello
I have 3 rental properties and want to double check for depreciation best practices.
Rental 1 Net income : -13,500 (Due to a lot of repair/renovation)
Rental 2 Net income : 6,000
Rental 3: 3,000
So i thought, I don't have to use "depreciation" since my all total rental income was negative (-,4.500) (I don't want to pay a lot of capital gain taxes when i sell my home although 1031 exchange is possible...)
But my CPA says this year negative loss (-4,500) will be carry over. Eventually, if i sell the rental home, I can use the carried over loss to deduct capital gain. My CPA recommends to use depreciation every year as even if there will be negative rental income (due to depreciation), it will carry over.
I am in new this rental business and appreciate if someone can advise best practice for depreciation.

No you can't use your carried loss to deduct your capital gain and you don't want it to.
PAL losses freed up from a qualified disposition offset ordinary income which is better. So you have some PAL to offset some sort of ordinary income (W-2) or recapture in year of disposal.
It's in 469.
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Sean O'KeefePro Member
CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes
3y
Quote from @Basit Siddiqi:

Taking depreciation is not an option but a requirement.

Furthermore, why wouldn't you want to take it.
The loss in excess of income either offsets your W-2 income or is carried forward and used when you sell the house.

Depreciation recapture is taxed at a minimum of 25%, however, the rental loss or suspended rental loss can be used to offset income at the highest tax rate.
Could not have said it better!
[email protected]628-241-0888
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