Help understanding depreciation

2 Replies

I’ve read conflicting answers on depreciation and how or if it can be used against w2 income. I have decided to get started investing in rental houses and I’m trying to understand the tax side before buying anything. My wife and I have $130-140,000 combined w2 income before anything comes out. Say we were to buy 1 or 2 $80-100,000 houses this year and on paper they created a loss. These would be under a property management company. We wouldn’t be actively involved. Would the loss be able to go towards the w2 income? If so wouldn’t it be beneficial to get a cost segregation done to take advantage of the 100% bonus depreciation to get a bigger refund and invest in another property? If we can’t use the lose would there even be a need to do a cost segregation?

@Waylon Black

Please do not look at rentals as tax shelters. It's only a thin icing on the cake. Buy them for cash flow and asset accumulation, not for taxes.

That said, you do not deduct depreciation. You deduct total losses after all deduction, including depreciation. At $140k combined W2, you can only deduct $5k of rental losses, and the rest will be pushed into future years. So cost segregation is pointless.

1. Rental losses can only be offset against future rental profits - your rental losses cannot be offset against your salary or other income to reduce your tax bill. @Waylon Black , you can accumulate those losses and depreciation for later, when you might have more rental income.  Any unused loss will be carried forward to your next tax year for possible deduction, or it will ultimately be allowed as a deduction when the property is sold.

2. Cost segregation gives you an acceleration on depreciation, but not an additional save on taxes. Instead of a linear equal depreciation spread over 27 years, you get more at the beginning, and less later.

3. I doubt a cost segregation study on 80-100K houses would be a cost efficient endeavor.