Rental property taxes vs. stock taxes

[Toks Fifo]

I'm confused about the tax advantages of rental properties as compared to stocks. For the following, assume I buy an SFR with 20% down, rent it out, and sell after 30 years.

I'm taxed on the "profit" (I'm not yet sure what the right term is here, but it's not particularly relevant at the moment), which is income - expenses. Importantly, expenses do not include your mortgage principal, but they do include depreciation. However, when I sell the house, depreciation recapture means I'm taxed on that prior depreciation deduction.

In simplistic terms, one of the following seems to be true:

1. I'm taxed each month on more than my profit. I.e. my monthly mortgage principal is not considered an expense.

2. I'm taxed each month on the profit only. But on sale, I pay LTCG on my appreciation and I pay tax on the full principal/depreciation.

With stocks, my dividend is taxed, but it's all profit. And when I sell, I pay LTCG on my appreciation only. I never pay tax on the principal.

Am I missing something? It seems the tax rules do not favor rental property investing.

(I know 1031 exchanges exist, but that's out of scope for the purposes of this discussion; you still pay taxes on the principal.)

[Dave Foster]

@Toks Fifo, You never ever pay tax on principle.  Your principle is also called your "basis" in the property (or in the stock).  You pay tax on gain only in real estate. Gain is determined as the difference between your adjusted cost basis and your net sale.

Original purchase price + capitalized improvements-depreciation = your adjusted cost basis.  The difference between this and your net sale is your gain and that is all you are taxed on.  You pay tax on depreciation recapture (yes you have to pay back the tax benefit) and on profit.  

Your last example is incorrect.  If you buy a property for $10 and sell it 30 years later for $15 you would have received the benefit of $10 roughly of depreciation allowance as a tax write off.  You have to repay that at a rate of 25%.  It's not a tax.  It's a repayment of a tax benefit.  You would also pay tax on the $5 of gain.  So you would pay tax on all $15 actually.  But $10 of it is a repayment of a benefit you received earlier.

Buy a share of stock for 10 and sell it 30 years later for $15 and you pay tax on the $5 of profit.  But you also didn't get the benefit of the depreciation write off over the years.  So you don't have to pay if back.

But which is better - paying $10 of tax now when the dollar is worth what it is.  Or paying $10 of tax later when the dollar is worth less?  So with depreciation you get to use dollars now for your benefit at current value and pay them back later at future value.

And don't forget who's paying the principle and interest on the mortgage - the tenant while you enjoy the write off of the interest and the pay down of the mortgage.. 

You can't depreciate stocks.  You buy them and sell them and pay tax on the profit. 

Real estate gets depreciation that you have to pay back and you pay tax on the profit.  Real estate lets you use the 1031 and defer all the tax and depreciation recapture indefinitely.