Claim depreciation on rental?

Question

I’m trying to decide if I should claim depreciation on my rental property.

The main reason I’m hesitant is that I’m currently a student in a low tax bracket and plan to be in a higher tax bracket out of college and someday when I go to sell the property. My understanding is that if I claim depreciation now, I’ll have more capital gains to pay taxes on when I sell.

My situation:

Currently have one rental property that I’ve owned for 7 yrs and rented for 4 yrs, which rents for ~$23k yr.

Currently in 15% tax bracket.

Eligible for ~$6500 yr in depreciation, but never claimed it

Any suggestions/insight would be greatly appreciated!

Josh

Russell Brazil · Answer

Depreciation is not an optional deduction.  You can certainly not take advantage of it....but when you sell, you still pay the depreciation recapture regardless.

Michael Plaks · Answer

@Joshua Bowers

as @Paul Allen explained, at the time of sale, you will be taxed as if you took all the depreciation - whether or not you actually took it. In this respect, not taking depreciation is throwing your money away. It's like refusing to take a student loan, but then being forced to repay it anyway.

You already have a major problem to fix, since you have not claimed the depreciation for 4 years. This has to be fixed, and it is a complicated process, not for DIY. It cannot be done by filing amended tax returns, a different process is required.

Also, neighbor, while you cannot refuse depreciation, the amount of depreciation you can somewhat control. And you may be able to adjust the amount of other deductions that result in undesirable/inefficient tax losses - both in the current year and the past 3 years.

Which is why us tax pros specializing in REI exist and are in demand. :)

Paul Allen · Answer

Read the Tax Strategies for the Savvy Real Estate Investor.

There are a few optional parts of the tax code. Whether or not to claim depreciation on your rental real estate properties is not one of them.

Best of Luck with Your Real Estate Investing!

Paul Allen · Answer

@Joshua Bowers

You have the gist of it, but some of the details are off.25% is the max rate for unrecaptured section 1250 gains. You might not have to repay it at that rate. It would depend on your income that year.

You will pay the capital gains tax whether you reinvest the money or not.

Look at it this way: With a rental property you are being permitted to deduct a depreciation expense against an asset that is likely appreciating. That provides significant tax benefits to owning rental properties.

Selling rental properties is often a very different tax story...

Joshua Bowers · Answer

So if I claim depreciation on the property each year I will have to pay 25% tax on the total depreciation deductions that I took and ~15% capital gains on the equity in my property when I sell (if I want the cash and don't reinvest in another property).

Just to confirm, you're saying that whether I deduct the depreciation each year or not, I will still be charged 25% on the total depreciation amount over the years of ownership?

Thanks.

@Russell Brazil

Joshua Bowers · Answer

Thank you everyone for the information. Time to see a tax accountant!

Basit Siddiqi · Answer

@Joshua BowersMentioning not taking depreciation for 4 years is concerning. You may be required to file a complex form when you file the 2019 return to catch up the missed depreciation.

Claim depreciation on rental?

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