Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
7y
@Charlie Moore
You need to consult with a CPA immediately. If you have not been declaring depreciation every year on your rental property you are literally flushing money down the toilet. And you will get smoked on taxes when you sell. Recapturing depreciation is mandatory by the IRS, whether or not you took the tax break in the first place.
Again, the IRS assumes you took the depreciation every year, so they make you recapture the amount when you sell. There is no stating “but I didn’t take depreciation”.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
7y
@Charlie Moore depreciation would show up on your schedule e. You should have been doing this from the start, and should amend all years that you have not taken depreciation.
When you sell, you'll have to pay tax on the depreciation, whether you took it or not, so take it every year.
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
7y
@Charlie Moore
You need to consult with a CPA immediately. If you have not been declaring depreciation every year on your rental property you are literally flushing money down the toilet. And you will get smoked on taxes when you sell. Recapturing depreciation is mandatory by the IRS, whether or not you took the tax break in the first place.
Again, the IRS assumes you took the depreciation every year, so they make you recapture the amount when you sell. There is no stating “but I didn’t take depreciation”.
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
7y
@Charlie Moore
Income taxes. Are you taking depreciation in your schedule E federal income tax form? Do you do your own taxes each year? How many years have you owned rental property and not taken depreciation on your Schedule E?
For example, let’s say your depreciation is $5,000 per year (most building depreciation is taken over 27.5 years). You don’t take that $5k for the last 10 years and then you sell. The IRS will assume you took that $50,000 in depreciation and make you recapture that depreciation in the year of sale. Depending on your tax rate, that could cost you easily $10-15,000 in taxes.
I highly recommend you consult with a CPA. I am not a cpa, but I hire one to do my income taxes. Do not try to fix this on your own!
Is this the same in Canada? I was under the impression if we don’t claim depreciation in Canada, you will just get taxed on capital gains when you sell not recapture.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y
@Charlie Moore some of your statements lead me to believe you do not understand tax law.
As others stated, you need to start claiming depreciation the year your property is put into service as a rental. That is the year you buy and rent out the property. Houses are depreciated over 27.5 years. You only depreciate the structure value. For example if you buy a house for $300,000 and the land value is $50,000 that means you depreciate $250,000 over 27.5 years (250,000/27.5=9091 per year). So in this example you would be able to claim $9091 worth of expense in a full year, which would help offset income (rent collected). When you sell the property, all the depreciation you claimed is recaptured and added to your gain, which becomes taxable. The problem is that even if you decide to never claim depreciation, you still must recapture and pay taxes on it. This law absolutely applies in your case where you are renting two houses.
Maybe this doesn't make sense to you, but I assure you ignorance of the tax law does not exempt you from having to follow the law.
If you have never claimed depreciation, I suggest you work with a CPA to amend your returns and get this corrected. I really recommend all starting investors use a CPA, because there are so many things you can miss or get wrong. You will probably end up paying less taxes if you hire a CPA so it is a good thing.
Is this the same in Canada? I was under the impression if we don’t claim depreciation in Canada, you will just get taxed on capital gains when you sell not recapture.
In Canada, depreciation of a capital asset for taxation purposes is called Capital Cost Allowance (CCA). It is not mandatory that you claim it in any given year or at all. CCA is calculated differently for different asset classes and, for buildings, differently than how depreciation is calculated in the U.S.A. for taxes.
If you do claim CCA on an asset (property), when you dispose of that asset, there will be a recapture which may result in taxes due.
After all that, you should consult with your accountant when deciding to claim CCA or not.
I do have a tax accountant just trying to make sure I understood for myself. If you don’t claim CCA each year, when you sell your property, does anything get recaptured or is that only if you DO claim CCA? That is my understanding anyway.
Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes
7y
Just a quick note to those advocating for amending the prior year returns if Depreciation was not declared.
Amendments are not an option in this scenario. You must prepare a form 3115 Change in Accounting Method in the current year to correct prior years and get the record set properly for going forward.
The form is not for the faint of heart. I recommend the OP engage with a competent CPA or EA to complete the filings. And perhaps look for somebody who is willing to educate because there are definitely some gaps in OPs knowledge.
Rental Property Investor · Long Island City, NY · Member since 2018 · 82 posts · 18 votes
7y
Unless you are talking about complicated depreciation tactics like super pro to break all the assets down and get to maximize the benefit, depreciation for your property is pretty straight forward. Of course if you ask your accountant, it can be done right away.
Even you calculate the depreciation expense by yourself, accountants usually calculate it by themselves to make sure that the numbers are correct as depreciation expense is one of the biggest and most important element of your tax filing for your real estate property.
If you like to take a look at the actual IRS guidance, here is the link.
Most likely your property should be categorized for one of these.
You should definitely find a competent CPA and have him or her solve the issue but I highly recommend you to study at least basics about not only depreciation expense but also accounting / bookkeeping for real estate / property management.