Refi till you die to renew depreciation?

Question

Hi guys,

1) Do I understand it correctly that if I owned a property for 27.5 years and cant claim  depreciation on that property anymore, If I refinance, I can start claiming depreciation again?

Or

2) If I sell this property then I will pay back the depreciation, but if I refinance I wont have to pay back the depreciation?

Are any of those statements correct?

Christopher Smith · Answer

1) No there is no depreciation "restart" as there is no new investment just additional borrowing against presumably fully depreciated property.

2) If you do sell you will need to recognize the depreciation recapture, if you refinance you will not have any immediate depreciation recapture. The depreciation recapture will be preserved for potential future recognition in the event you do sell the property.

Alexander Szikla · Answer

Depreciation is based on your cost basis (purchase price plus improvements). Separate and apart from refi.

Depreciation acts as a paper loss against income but lowers your cost basis, so capital gain will be higher upon sale (unless you 1031X - but that's another conversation).

For example, if you buy a property for $100,000 that generates $6,000 per year (we will assume no financing for simplicity), then you can depreciate (1/27.5) $3,636 and pay income tax on $2,364 (the difference). However, if you sell for $110k your gain is not $110k-$100k but rather $110k-$100k-($3,636 * no of years depreciated).

Theresa Harris · Answer

I can't speak to the depreciation, but if you are constantly refinancing your rentals, the only money you will have is the cash flow.  I'd rather have equity in some and the mortgage paid down a bit, so at some point you can start selling them and benefitting from a good amount of money.

Ashwin Goel · Answer

@Ashish Acharya @Christopher Smith Would it make sense to refinance before a sale to minimize cap gains?  E.g., I buy a $500K home and many years later, it depreciates down to $300K and the market value is $800K.  Would it make sense to refinance, cash-out, sell it at $800K, then once you payback the bank ~$600K for the re-fi loan, would you just pay cap gains on ~$200K or so?  Or would it still result in a full depreciation recapture and cap gains on $500K or so ?

Ashish Acharya · Answer

1) not correct.

2) Yes, but you cannot keep on refinancing to get the cash unless your value went up or you paid down the loan.

Christopher Smith · Answer

Yes that is correct

Mary Jay · Answer

Thank you.

So if I dont sell the property but keep refinancing it, then I dont have to pay the depreciation back?

Refi till you die to renew depreciation?

Most Popular Reply