Information on depreciation

17 Replies

Good morning,

as I am very small I am trying to fill my tax return for my duplex by myself.

The IRS documentation seems clear but not on houses depreciation.

My doubts are:

1) Should I start using depreciation from the first year even if I do not need it in that year, or I can use it when it is needed? I fear that if I do not use it from the start I will not be able to use it anymore

2) Are there good explanations and examples on how to do it properly?

Thanks for any suggestion

Yes, use it from year one, because when you sell you will have “recapture”, pay taxes on the amount that depreciation would have been,  for those years of depreciation whether you deducted them or not.  And, if you can’t actually benefit from the depreciation that year, it will carry over help you on cap gains I believe.

@Paolo F. ,

You start depreciation starting the date when your duplex was available to rent. It is called a “placed in service” date.

So, the date you posted it for rent, I would use that date. 

If you don’t depreciate from this date, IRS will assume you did, and you have to recapture this even if you didn’t benefit from it. 

I am not sure what you mean by you didn’t need it, may be you can clarify. 

Remember you have to allocate value to land and building and just depreciate the building. 

Also depreciate half of the building if your units are identical. 

1) Only if you want to a) comply with the law and b) not pay more in taxes than you are required.

2) https://www.biggerpockets.com/renewsblog/2014/09/11/yes-you-can-write-off-your-depreciation-heres-how/

Originally posted by @Ashish Acharya :

@Paolo F.,

You start depreciation starting the date when your duplex was available to rent. It is called a “placed in service” date.

So, the date you posted it for rent, I would use that date. 

If you don’t depreciate from this date, IRS will assume you did, and you have to recapture this even if you didn’t benefit from it. 

I am not sure what you mean by you didn’t need it, may be you can clarify. 

Remember you have to allocate value to land and building and just depreciate the building. 

Also depreciate half of the building if your units are identical. 

 Thank you all for your replies. Let me explain.

I bought the duplex in late October 2017. One unit was rented, but the rents are still held by the property manager, so in 2017 my income was 0. (I switched property manager in 2018, rented the second unit in May, now I am receiving the rents).

I do not need any deduction for a 0 income, so it would be very simple if I hadn't to attach the additional module for depreciation. I would file the federal tax return mainly for the ECI declaration and to submit the city return which is mandatory anyway.

By the way, I believe that the depreciation value is the County building (not land) assessed value divided by 27.5 (not sure if all years the value is the same, will check). Of course if one unit is rented the value is halved.

Would be convenient for me to start all depreciation in 2018 (tax return filed in 2019)

@Paolo F.  

You will still need to claim depreciation in 2017- even though no income since it was in service. 

Your depreciable amount will be the amount you paid + qualifying closing costs. 

This amount will need to be then adjusted by the building value. 

If the county says the property is worth $100k and allocates $35,000 to building. Then 35% is your depreciable building value. 

Then 35% of your above purchase price + closing will be depreciable. 

I would not take into consideration 1 of the 2 being vacant. 

It should be depreciated over 27.5 years as of the date you purchased it. 

I end up amending a lot of returns due to this being done incorrectly so if you're really not sure I would recommend reaching out to a professional. 

Originally posted by @Paolo F. :

By the way, I believe that the depreciation value is the County building (not land) assessed value divided by 27.5 (not sure if all years the value is the same, will check). Of course if one unit is rented the value is halved.

Would be convenient for me to start all depreciation in 2018 (tax return filed in 2019)

Do not half the value if only one unit is rented. It's accounted for as a whole property. 

You also shouldn't file incorrectly by waiting until 2018. Just because no income in 2017 doesn't mean you just get to choose to not reported your related expenses. 

@Paolo F.

If you acquire another investment property in the future - you should claim depreciation when the units are placed in service(once the units are in livable condition).

Regarding the property you purchase in 2017 - you may need to start claiming depreciation on your 2018 return by doing a "change in accounting" which allows you to include the missed depreciation from 2017 onto your 2018 return.
I likely would not do this on your own.

@Paolo F.

I understand trying to save money by avoiding tax professionals, but this discussion should have illustrated why it might backfire.

1. As everyone said - depreciation is not optional. You must start in 2017.

2. And you depreciate the whole building, as @Natalie Kolodij pointed out.

3. Not sure why you are "afraid" of that - there should be no negative consequences of starting depreciation in 2017.

4. Rents "held by" your property manager does NOT mean zero income. It is still income to you. The property manager is merely an agent acting on your behalf.

5. Suggestion by @Basit Siddiqi is problematic. It implies you can forego 2017 depreciation and catch up in 2018. Not really. You will need to amend your 2017 tax return if it has already been filed. The "change of accounting method" procedure does not apply when you only missed 1 year of depreciation.

6. Finally, if you're indeed living in Malta, there're additional complications of being a foreign investor. This really needs to be handled by an expert. Have a look here

7. But frankly, I do not recommend trying to go thru the IRS documents on your own. I admire your determination to learn these things - depreciation, international treaties etc. - but it is far more difficult than you probably expect.

PS. If you think this was self-serving - it was not. I don't even work with International clients.

Michael,

it is not just for saving money. I keep on hearing different things from various CPAs (friends' ones, some I contacted, and others); also at the IRS people do not always seem to know what they are talking about.

To find the right people... I must know the subject! So in my case I believe I can do by myself: learning lets me plan better. I believe I can get to understand the whole thing, meanwhile I will make mistakes but I believe the cost will be small given that it is small money. I started small for this reason.

I must begin depreciation now, I got it, no problem. Just hoped I could defer it but as you said, no big deal in starting from 2017.

I also found that you can carry on losses (0 income - expenses) on future years income, so definitely that is the way to go.

Both the property manager and a CPA told me that the rents become income for me when they are released to me. As they are still held, they can't be 2017 income. If you say they are, you are just proving that it is hard to find consistency in CPAs.

Actually you may be right because in my opinion  if the expenses (property manager fees, inspection cost for example) belong to 2017, so the income should even though the property manager still holds the money.

As I always did all my accounting, I am doing as well the Malta part, and I think I know what to do. Given my planning, it should be really simple (if I don't have to pay tax in Malta, there should be no complication with tax treaties). Thanks for the links anyway.

I also do it because I always had a certain interest in the subject.

Thanks again for your input.

Originally posted by @Paolo F. :
Originally posted by @Ashish Acharya:

@Paolo F.,

I bought the duplex in late October 2017. One unit was rented, but the rents are still held by the property manager, so in 2017 my income was 0. (I switched property manager in 2018, rented the second unit in May, now I am receiving the rents).

 Rents held by your agent are still income to you.  If the agent was holding them against reimbursed expenses, then you still declare that income and also the expenses.

If I were you, I would stop doing your own tax return and hand it over to a qualified professional.  I'm not sure you have the knowledge required to complete this on your own.

PS - there is no shame in handing these things off to a professional.  You can either spend the hours to really learn this stuff in depth (CPAs spend years learning all the intricacies) in order to save yourself what is probably less than $600.  Or you can go out and increase your business and spend that time on something that is either financially, emotionally or spiritually more profitable with the calm and peace of knowing that your taxes were completed properly.

Thanks Linda, I am thinking about handing off to a professional, but it is still difficult for me. When I do it, it brings me costs, headaches and waste of time. Peace of mind comes when I do things myself (not only accounting).

As to tax returns I was only audited in 1998 in Italy because I (correctly) used a form to pay taxes while everyone uses it to get refunds. I fixed the issue straight away, there was no real problem.

Hope it will continue like this.

I read IRS publication 946. Appendix A chart 2 tells you how to fill form 4562. It points to Table A6 where you have depreciation percentages for each year. Should not be that difficult.

I read also publication 551 to know how to compute the basis.

My case is simple as I do not have a mortgage, but still they do not mention brokerage fees. I understand I can include them in the basis as part of the cost of getting the property, but it is not very clear. I paid an important assignment fee.

@Michael Plaks

"6. Finally, if you're indeed living in Malta, there're additional complications of being a foreign investor. This really needs to be handled by an expert. Have a look here."

Highly agree with Michael.  A non-resident alien investing in the US adds wrinkles to tax compliance not encountered with your plain "vanilla" US citizen or resident alien tax return.  The penalties associated even with non-willful failure to file some of these forms is steep.  Not to preach, but if a non-resident alien is going to invest in the US, they should build the cost of a solid tax CPA or tax attorney with inbound international tax experience into their operating costs.  Yes, it won't be cheap, but not doing so could cost them even more money in penalties and interest.

@Paolo F.

"it is not just for saving money. I keep on hearing different things from various CPAs (friends' ones, some I contacted, and others); also at the IRS people do not always seem to know what they are talking about."

Reps at the IRS are not authorized to give tax advice, and it can't be relied upon, even when they're trying to be helpful.  Most of the people that you will get on the phone will not know tax law and filing obligations.  The ones that know about this will be higher paid and not answering phone calls from the general public.  You keep hearing different things from CPAs because international tax as it relates to the US is complex.  Not all CPAs have developed a niche in it or even deal with it.

Publication 527 holds almost all the relevant information for rentals and information on depreciation (such as depreciating all the building when some units are vacant). Something useful on depreciation is also found on Form1040 schedule E instructions.