Homeowner · Corpus Christi, TX · Member since 2008 · 199 posts · 16 votes
I bought a rental (Town Home) back in 2004 & have been taking a depreciation so that I could get a bigger tax return. The CPA that did my taxes this year advised me that I shouldn't be taking a depreciation if I plan on selling (which I do in a couple of years) cuz I will have to pay capital gains on that amount. My goal is to make as much money off it when I sell it so should I stop taking a depreciation? Any advice would be great cuz I don't know much about investing.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
18y
This issue has been discussed a few times before. I'll wade in yet again, since I now have a new CPA who seems to actually understand real estate investing.
I assume you are referring to the straight line 27.5 year depreciation that's currently allowed, and not the accellerated depreciation allowed on some properties acquired long ago.
It is my understanding, confirmed by recent and in-depth conversation with my new CPA, that you will have to pay depreciation recapture tax on the amount of the depreciation when you sell the property. Depreciation reduces the basis, and so increases your gain on the sale.
This is different than in another thread where RECPATAXMAN and I discussed this point, and came to the conclusion that the depreciation recapture applied only the accellerated portion. Since accellerated depreciation doesn't apply to properties purchased recently (sincee 1987?), you wouldn't have to pay the recapture tax. According to my new CPA, which has extensive real estate experience, that's incorrect. Yes, there was a recapture tax for accellerated depreciation. Maybe still is, if you have a property under those rules. The recapture for the straight line depreciation is different and does still apply.
Its also my understanding that the basis for your property is reduced by the depreciation allowed, not the depreciation taken. So, doesn't matter whether you take it or not.
I'm sure you'll get other posters with different responses.
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
15y
Originally posted by David Steltzer:
I think you would have to file amended returns. As of now thru April 15, 2010 (or Oct 15 if 2006 went on extension), you would be able to amend back to 2006 tax return. The rule is that the amendment deadline is 3 years after return due date (2006 return would have been due Apr 15, 07 or oct 15 on extension).
Just in case anyone is still following this thread and is considering filing an amended tax return 2007 tax return.
The deadline for filing an amended tax return for 2007 is April 15, 2011. The rule for amended returns is three years from the ORIGINAL due date, or two years from the date the taxes were actually paid, whichever is later. The original due date for 2007 returns was April 15, 2008, so, the amended return is due on or before April 15, 2011 even though the due date for your 2010 return is April 18, this year.
If the due date was April 15. 2008 and you used the extension and did not actually pay your taxes until Oct 2008, then three years from the original due date is later than two years from the date the taxes were actually paid,
Seminole, OK · Member since 2011 · 2 posts · 0 votes
14y
This may have already been discussed since this thread is over a year old.
I have been thinking a lot lately on exit strategies and have been looking at depreciation recapture. I am retired and in lower tax bracket and think it would be wise in my case to not take depreciation on rental property. I think I would pay more on recapture than it would save on current tax savings.
I understand about allowed and allowable depreciation, but I think you can use form 3115 (IRS Revenue Procedure 2004-11) at the time of sale and basically not have to pay any recaptured depreciation tax if you never claimed any depreciation.
Hopefully some of you are familiar with this and can explain it to a layman.
Oh... My first post to an awesome sight. I have learned a lot from reading you guys post...Thanks
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
14y
James D,
Taking the depreciation each year reduces your taxable rental income. If you don't take the depreciation, then your taxable rental income will be higher and so will your tax bill on your 1040. When you sell the property, the depreciation that you should have taken will be taxed at 25% anyway, no matter what your ordinary income tax bracket is. So, by not taking the depreciation, you are paying a higher tax on your rental income, and still paying the tax on unrecaptured depreciation when you sell.
Waiting to do the catch up depreciation accomplishes the same thing as taking the deprecation as you go. You are just putting it all in a lump sum but it should work out to about the same tax impact over the same period of time.
Seminole, OK · Member since 2011 · 2 posts · 0 votes
14y
Dave T
When I sold the rental in the same tax year as the catchup wouldnt the allowable depreciation be offset by the catchup. Basically making it non taxable event.
Maybe what Im not understanding is the allowable will be taxed at 25% at time of sale and the catchup would just be used to reduce my ordinary income.