How can I show depreciation for my properties? Tips?
Rental Property Investor · D.C · Member since 2019 · 501 posts · 102 votes
How can I show depreciation for my properties? Tips?
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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”.
85 Replies
- Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes7y
@Charlie Moore if the property value is $20k (not what you paid, what its worth), and the land is worth $10k, you would depreciate (divide) $10k over 27.5 years. So every year, you would show an additional loss of $360.
If you sell in 10 years, that $3600 depreciation will be added in as income on your taxes and you will pay taxes (currently 25%) on that $3600 even if you didn't claim it.
Now, on a $10k property, it's not a huge deal, but if you have a $100k property, under the same scenario, your talking $36,000 in taxable income.
Google and BP are not a substitute for an accountant. It sounds like you need an accountant, because it's very likely that, if you're doing your own taxes, you are paying a ton more in taxes than you should be.
- 7yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by @Nick Cote:
Thanks! @Roy N.
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.
If you never claim, CCA, then there would be nothing to recapture at disposition.
- Rental Property Investor · D.C · Member since 2019 · 501 posts · 102 votes7y
@Jason D.
I am just confused on the concept of
If I don’t claim it, I get taxed lol
If I do claim it, I still get taxed
So what is the PRO of claiming it
- Contractor · Member since 2019 · 3 posts · 2 votes7y
@Charlie Moore
Let's say you have a $200,000 house. Over the time you owned it, your depreciation on paper was $50,000. The IRS is going to assume you filed for that depreciation, whether you did or not.
So, let's say you sell that house for $175,000. As far as the IRS is concerned, you bought it for $150,000 because it depreciated that much. So even though you made a $25,000 loss in reality, the IRS is going to say you made a $25,000 gain, whether you claim the deduction or not.
If you claim the deduction, you save on your taxes during those years you owned it.
- Contractor · Member since 2019 · 3 posts · 2 votes7y
At least that's my understanding, I haven't had to deal with this myself yet. Consult a CPA, you're probably going to need one to be honest.
- Contractor · Member since 2019 · 3 posts · 2 votes7y
@Hideyuki Gojima
Hello Hideyuki,
Can I ask what super pro depreciation is and where I can find more information on this? Is this method available for non licensed investors?
- 7yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by @Chris Follmer:
...
If you claim the deduction, you save on your taxes during those years you owned it.
It's more like a long tax deferral ... save in today's dollars, pay in tomorrow's. Depending upon your current and future tax situation, there may be additional advantages.
- Westchester, NY · Member since 2018 · 38 posts · 52 votes7y
Originally posted by @Charlie Moore:
@Jason D.
I am just confused on the concept of
If I don’t claim it, I get taxed lol
If I do claim it, I still get taxed
So what is the PRO of claiming it
The pro of claiming it is you get to keep some of the money that would otherwise have had to pay towards taxes. A dollar today is worth more than a dollar tomorrow...
- Watertown, MA · Member since 2016 · 53 posts · 42 votes7y
An additional pro is the idea that the taxes can be (essentially) indefinitely deferred through 1031 exchanges.
- Rental Property Investor · NJ · Member since 2019 · 30 posts · 6 votes7y
Originally posted by @Chris Follmer:
@Hideyuki Gojima
Hello Hideyuki,
Can I ask what super pro depreciation is and where I can find more information on this? Is this method available for non licensed investors?
This information is not about license but its more like a utilization of depreciation methodology. Usually accountants or special consultants who are experts in real estate taxation know how to do this properly. Regular accountant is not enough. Basically the idea is that if you calculate the depreciation with the common basis mentioned for 27.5 years, you have to depreciate your expense over the next 27.5 years no matter what. But if you think about it, your property is a group of assets. If you break things down such as some equipments, Kitchen appliances, or special roof or something, each asset has a different life term. You can depreciate each asset over different life term. The total amount of those broken down assets have to be the amount you purchased at for the entire property tho. I think it is very rare to do this kind of method for normal residential home because it costs a lot of money (hiring the experts) the benefit simply does not cover the cost. The common practice is that large company hires these tax experts to break the assets down and calculate the depreciation expense for each separated asset to maximize the tax benefit.
- Rental Property Investor · Long Island City, NY · Member since 2018 · 82 posts · 18 votes7y
Originally posted by @Jake Kinoshita:
Originally posted by @Chris Follmer:
@Hideyuki Gojima
Hello Hideyuki,
Can I ask what super pro depreciation is and where I can find more information on this? Is this method available for non licensed investors?
This information is not about license but its more like a utilization of depreciation methodology. Usually accountants or special consultants who are experts in real estate taxation know how to do this properly. Regular accountant is not enough. Basically the idea is that if you calculate the depreciation with the common basis mentioned for 27.5 years, you have to depreciate your expense over the next 27.5 years no matter what. But if you think about it, your property is a group of assets. If you break things down such as some equipments, Kitchen appliances, or special roof or something, each asset has a different life term. You can depreciate each asset over different life term. The total amount of those broken down assets have to be the amount you purchased at for the entire property tho. I think it is very rare to do this kind of method for normal residential home because it costs a lot of money (hiring the experts) the benefit simply does not cover the cost. The common practice is that large company hires these tax experts to break the assets down and calculate the depreciation expense for each separated asset to maximize the tax benefit.
Yea... thats pretty much it. lol
- Member since 2018 · 34 posts · 54 votes7y
@Charlie Moore Are you reporting the income from your rental properties on your tax return? If you aren't, you're committing tax fraud and eventually the IRS will catch up to you.
If you are reporting the rental income but not reporting the depreciation expense, then you are paying too much in income taxes today. Very simple example, but suppose your properties generated $10,000 in gross rent in 2018, and that you had $5,000 in expenses not including depreciation (mortgage interest, property taxes, insurance, etc). The remaining $5,000 would be taxable income. If you were in the 22% tax bracket, you'd pay $1,100 in income taxes on that $5,000.
Let's assume the depreciation expense for your properties is $4,000. If you properly reported that as you should, now your taxable income is reduced to $1,000 ($5,000-$4,000) and at your 22% tax you would owe $220 on that income.
In short, your paying too much in income taxes today and a visit to a CPA is likely going to save you money.
(I am not an accountant and this was a simplified example)
- Rental Property Investor · D.C · Member since 2019 · 501 posts · 102 votes7y
@Mark Gauger
Not tax fraud. Yes I report all my income from rental property
No I don’t fear the irs, because there isn’t a reason to
And yes, I just wanted to learn about depreciation
- Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes7y
When did you buy the properties?
Seems like everyone is assuming you've had them for 2 or more tax years but you've never stated when you bought them, nor is that information on your profile page.
You should take depreciation. Failing to take depreciation on a building or choosing not to take depreciation is an impermissible method of accounting.
- Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes7y
You don't need to pay for a CPA just use TurboTax it can easily do the depreciation deduction for you.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
Originally posted by @Charlie Moore:
@Joe Splitrock
Your reply really doesn’t make sense
I bought the home for 20k... my land value, the county said is 10k
So now I take 10k divided by 27.5? Lol
Yes, but not sure why that is funny. You are required by Federal tax law to file an accurate return, which includes claiming depreciation. Depreciation reduces your taxable income. You are taxed later on depreciation recapture and property value gain, unless you do something like a 1031 Exchange. A 1031 Exchange is when you sell one property and buy another rental property. Rules and time frame apply, so understand how it works BEFORE you do it.
Your purchase price of $20K is extremely low and with only $10K total of depreciation, there won't be hardly any benefit (or taxes when you sell). There is no reason not to do your taxes properly.
My guess is since you don't understand property depreciation, that you are likely not claiming other expenses correctly either. For your own benefit, I really suggest having a CPA review your taxes.
- Specialist · San Francisco Bay Area · Member since 2018 · 221 posts · 160 votes7y
@Eamonn McElroy
Thoughts on this statement:
“While depreciation not claimed, under allowed vs allowable, would not be subject to recapture taxes, the unclaimed depreciation would reduce the basis in the property”.
I have a CCH or Bradford article on this subject I can link later, but cannot also remember if this was specific to a home office depreciation deduction.
Economically, why someone would not claim depreciation is beyond me.
- Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes7y
Originally posted by @Charlie Moore:
@Jason D.
I am just confused on the concept of
If I don’t claim it, I get taxed lol
If I do claim it, I still get taxed
So what is the PRO of claiming it
Yes, you are confused. This is from ignorance of the law.
#1 - The IRS does not care if you are confused. They consider it your responsibility to become educated. They call it fraud when you screw it up, and can enforce penalties, interest and even jail time - that's how they got Al Capone. If you don't like that, the appropriate channel to complain about it is through your elected representative.
#2 - You are missing a tax deduction annually by not claiming allowable deprecation - so you are paying more each year than you need to.
#3 - When you sell, the IRS requires you account for the depreciation claimed along the way, or depreciation you should have taken along the way (for people like yourself who ignore the rule), so you are required to pay at sale.
#4 - If you refuse to do these things, you are committing tax fraud - Annually by overstating your income each year, and finally by understating your capital gain at sale.
#5 - I'm going to guess part of your confusion is caused by the "two-touch". It does seem strange that a person would get a tax break at one point, only to pay taxes on that same amount later - I get how that could seem strange - but it is what it is.
My advice, is to keep very accurate records. You will also need a source to account for the value of the land, the municipal assessment will do. A CPA chimed-in here and has said you might need to do more than an amended return at this point - have fun with all that. Maybe after you go through some troubles with this stuff, you will take all of it more seriously.
I have always done my own taxes and am pretty decent at it. As a very foolish move, because I was caught up in all the other stuff that goes with this business, I failed to file partnership returns for two years. I went back and fixed that after I realized my blunder (very embarrassing, very out of character) and the IRS penalized me almost $5000. Keep in mind, I still reported every penny, and paid every penny of tax owed, I simply reported the income on the wrong form in the wrong way. $5000 for the wrong piece of paper my friend.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes7y
OP: You really need to just have someone else do your taxes based on your level of understanding. Not only to keep you out of trouble, but also to keep you from paying what you don't/shouldn't be paying. Depreciation is one of the gems of owning real estate in the first place - it's the paper devalue that lowers your taxable income. It's not a complicated formula - you deduct about 3.64% of the value of the structure (land is excluded) every year for 27.5 years. At that point the IRS considers the property fully depreciated (meaning it has zero value as an asset). Of course, we all know that in reality you will likely make money on that property when you sell it, so when you do the IRS claws back all of that benefit they gave you on depreciation. Since the IRS assumes everyone takes the deduction, they add it back into your taxable income when (if) you sell depending on what year.
When you calculate depreciation (virtually all tax programs do this for you), you work off the basis of the structure only. You can usually calculate the basis from your county's tax card - either they give you the basis, or you calculate it on your own. Calculating your basis from your tax card:
House/structure value divided by total assessment, as a percentage, times what you actually paid.
Example: Your county says the total appraised value is $100,000 - $90,000 for the structure and $10,000 for the land. $90,000/$100,000 = .90, or 90 percent.
So let's say you bought the place for $100k plus $5k in associated closing costs. Your basis is going to be:
$105,000 x .90 = $94,500. That's your basis in the property. You are going to depreciate ~3.64% of that every year for 27 years. So every year on your Schedule E you are going to have $3,440 of depreciation for this property. If the property rents for $500 per month, and assuming you had no other expenses (not true, but for illustration purposes), you are going to show an annual income for that property of $2,560 instead of $6,000. That $3,440 depreciation deduction will show up every year on your taxes.
If you sell the property, all of the depreciation deduction you took (or didn't take, if you screwed that up) from the time you bought until the time you sell is going to be added back to your taxable income, because it was deducted each year. So in this case if you sold this house after 10 years, you're going to add $34,400 to your taxable income ($3,440 x 10 years of deductions). That plus any capital gains on the sale of that house might make it a really painful transaction - especially if you didn't take advantage of the tax write off each year.
Skyline Properties - Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
Originally posted by @Account Closed:
Originally posted by @Charlie Moore:
@Jason D.
I am just confused on the concept of
If I don’t claim it, I get taxed lol
If I do claim it, I still get taxed
So what is the PRO of claiming it
Yes, you are confused. This is from ignorance of the law.
#1 - The IRS does not care if you are confused. They consider it your responsibility to become educated. They call it fraud when you screw it up, and can enforce penalties, interest and even jail time - that's how they got Al Capone. If you don't like that, the appropriate channel to complain about it is through your elected representative.
#2 - You are missing a tax deduction annually by not claiming allowable deprecation - so you pay more each year
#3 - When you sell, the IRS requires you account for the depreciation claimed along the way, or depreciation you should have taken along the way (for people like yourself who ignore the rule), so you are required to pay at sale.
#4 - If you refuse to do these things, you are committing tax fraud - Annually by overstating your income each year, and finally by understating your capital gain at sale.
#5 - I'm going to guess part of your confusion is caused by the "two-touch". It does seem strange that a person would get a tax break at one point, only to pay taxes on that same amount later - I get how that could seem strange - but it is what it is.
Good luck.
On your point 5, it is actually logical when you think about it. The structure is a business expense and has a limited life. You spend $100,000 on a structure and are allowed to expense it over 27.5 years. They are basically saying that every year 1/27.5 of the value is lost in the structure. Most items do degrade over time, such as a roof or HVAC system. It steadily loses value until it is worthless. The difference with a structure is that it appreciates, mostly due to location, inflation and the cost of new construction. At the end of 27.5 years if the building had decreased in value to $0, then you would owe no taxes. It is only because the property holds or increases in value, that you are stuck paying recapture.
Here is a smaller example to help illustrate further. Let's say I purchased a computer for my business for $800 and took immediate expense of $800 on my taxes. Then three years later I sell that computer for $100. I would be required to claim that $100 as income to the business. The total cost of the computer to my business was $700. The other $100 was an expense year one and income year three, so the two just wash.
- Flipper / Landlord · Tyler, TX · Member since 2016 · 255 posts · 126 votes7y
@Charlie Moore I feel you Charlie, 10k property hardly gives a benefit to depreciate. Not much money honestly over the 27.5 years so i understand your reasoning. But you have to do this, I have mobile homes that i rent out and i have to take depreciation. its a small amount like 100 or 200 i depreciate from every mobile home but i still do it. Turbo Tax is what i use, and it calculates it based on your cost basis.
- Chartered Financial Analyst (CFA) · Boston, MA · Member since 2018 · 40 posts · 14 votes7y
Let's break down your scenario into two calculations: 1. You don't take the deduction, 2. You do.
Disclaimer: I am not a CPA, this is just my understanding and obviously very high level.
Assumptions: Purchase price $20K, land value $10K. Rent is $200 p month. Your marginal tax rate is 30%. You sell in 10 years for $40K. Cap gains tax is 20%.
Scenario 1 (no depreciation deduction taken)
Rental Income for 10 years: (200*12*10) = $24,000. Annual Depreciation deduction taken = $0.
Profit reported to IRS (over 10 years) = (24,000-$0*10) = $24,000. Total Tax paid = 24,000 * 0.3 = $7,200. Rental profit = $16,800.IRS depreciates your property regardless (Over 27.5 years), which = $10,000/27.5=363 per year, which is $3,636 over ten years. To the IRS, your cost basis is now $20,000 - 3,636 = $16,364.
When you sell, you will pay taxes on the difference between $40k and the IRS cost basis. So you're paying capital gains (20%) on $40,000 - $16,364 = $23,636. Your net profit should be $23,636 * .8 = $18,908.
Scenario 2 (you take the depreciation deduction)
Rental Income for 10 years: (200*12*10) = $24,000. Annual Depreciation deduction = $363.
Profit reported to IRS= (24,000-$363*10)*.7 = $20,364. Total Tax paid = $20,364*0.3 = $6,109. Rental Profit = $24,000 - 6,109=$17,890 ($1,090 more than in scenario 1)When you sell, you will make the same amount on the sale as in scenario 1.
When you compare the two scenarios, you end up making more money by taking the deduction. Obviously $20K property is small, but when you scale this up it really makes a difference.
- Real Estate Broker · Los Angeles, CA · Member since 2018 · 300 posts · 146 votes7y
Get an accountant.
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