tax advantage question

[Matt F.]

can someone give me a quick summary of the tax benefit to owning a rental prop?  i understand about using all the expenses to help offset the income generated by the property, then with depreciation, you may end up in a "paper loss" position for the year....which depending on your W2 income, may be deductible.   can any one expend on that or am i right in thinking thats pretty much it?  

also - can anyone expand on stepped up inheritance? 

[Daniel Dietz]

@Matt F.

@Matt F.

I think @Dave Holland hit the nail on the head as far as depreciation being the biggest benefit. For example, if you bought a 100K property for rental and after expenses NOT including the depreciation you make say $1800. But now for tax purposes you get to take say $3000 depreciation, you will actually show a LOSS of $1200. Depending on tax bracket that might save you $200 - $600 in taxes as you get to offset your normal income with that loss. 

Multiply that by 10 and you are starting to save some serious money on taxes!

I am working on a deal right now where the seller is dealing with a 'stepped up basis' situation as their spouse just pass away. I am NO tax professional, so take this with a grain of salt. To my knowledge it varies somewhat by state in his situation as it is a 'marital property issue' as well as 'inheritance' issue. In my state of WI, it sounds like both the capital gain AND the 'depreciation recapture' that is subject to capital gains (at 25% rate) are BOTH stepped up to current values. 

I am assuming it is similar in an inheritance with unrelated parties. 

One example I read was a 1,000,000 property bought for 200K. Fast forward 30 years its worth 1M. If the owners 'gift it to someone BEFORE death' there might be tax on the whole 800K of gains. If they keep it until death, and then it is inherited, there might be NO tax. 

Definetly worth talking to a tax professional about. 

Dan Dietz