Eventual loss of depreciation and mortgage interest

[Mark Stone]

Hey Everyone,

I was brainstorming about shielding rental income from taxes and had a few questions. Thanks in advance for any help you can provide.

Last year I bought a triplex with little money down, and took out an owner-occupied loan. I plan to move out within the year. When filing last year's taxes all of the rental income was shielded by writing off losses via a combination of depreciation, loan interest, fees for loan origination, other closing costs etc.

It got me thinking though as time goes on the amount of interest that I will be able to write off will decrease as more of my mortgage payment is on principal and not interest. Also, thinking really long term in like 27.5ish years when I won't be able to depreciate anymore that will be even less I can write off.

So my question is, do people who own a property for a long time eventually find it harder to shield their rental income (which would also have hopefully been going up as well). Is it a strategy to sell your property, and then do a 1031 exchange into a larger income producing property, take out another loan to cover the additional cost and therefore provide you with a new depreciation write-off as well as more mortgage interest to write off right off the bat?

Not sure if I am logically missing something here as taxes aren't my thing. Thanks!

[Dave Holland]

@Mark Stone

Yes Mark you are thinking about this correctly.  Keep in mind also that you'll be adding capital assets to the property as you own it as well.  If you own a property for 27.5 years, chances are you'll have replaced the roof, heating system, appliances, remodeled, etc. all of which you'll depreciate.

But you are right that chances are by the time the original building deprecation is done at 27.5 years of owning the property that you'll most likely show higher taxable income.