should you always claim depreciation?

Question

Is is always a good idea to claim depreciation on your rental property for tax purposes? I recently learned that if you sell the property for more than its depreciated value, you'll owe tax on that gain through the depreciation recapture tax. That seems like that defeats the purpose of doing it in the first place.

Kyle J. · Answer

@Jesse Hodges It’s not really a question of whether or not you should take it. You have to take it. Here’s a blog post that actually addresses your exact question in more detail:

https://www.biggerpockets.com/blog/2014-07-31-four-depreciation-tax-mistakes-investors-need-avoid

Basit Siddiqi · Answer

@Jesse HodgesYou should always claim depreciation because you are required to.Also, claiming depreciation now and having it calculated back on the sale doesn't necessarily always defeat the purpose.Not everyone will sell the property.I would also rather get a deduction today and pay taxes tomorrow. Time value of money is powerful.

Jesse Hodges · Answer

@Kyle J.

Thanks for the great article! Very informative and useful. I clearly have a lot to learn on this front.

@David M. @Bill Brandt. @Joe Splitrock

Thanks for the great feedback. I didn’t realize the depreciation recapture tax would be taken by IRS wether I took took the depreciation or not. Very interesting and good to know.

Twana Rasoul · Answer

You'll have to take the depreciation...also you can always 1031 exchange to another property to defer taxes.

Jesse Hodges · Answer

@Basit Siddiqi

Thanks for the feedback. I apparently had a very limited understanding of how depreciation works with real estate and now I really know that I know nothing. Having CPA's such as yourself on the BP forums is a huge help which I sincerely appreciate. Also great point about the time value of money. It can be easily forgotten a dollar today is worth more than a dollar tomorrow.

Joe Splitrock · Answer

If you failed to claim depreciation in previous years, talk to a CPA about how to catch it up going forward. There is some major tax savings for you.

Joe Splitrock · Answer

As others pointed out, you will be taxes as if you took deprecation regardless of whether you claim it. Aside from that, depreciation is usually your largest deduction against income on a rental property. If you remove that, you are most likely paying extra taxes every year. I would make no business sense to not claim deprecation.

Bill B. · Answer

Jessie, I’m not quite sure what Dave is trying to say but...You will pay 25% tax on depreciation recapture when you sell without exchanging if you don’t die first.

You will pay that 25% tax even if you never took the depreciation. The irs will tax you on the depreciation you could have taken.

Eric James · Answer

You're going to owe the deprecation recapture whether you claim it or not.

David M. · Answer

@Jesse Hodges

You can choose not to claim the depreciation, but as you found out, the irs will tax you on the full amount that should have been taken through depreciation unrecapture.

It’s sort of a “pay me now or pay me later game.”  But, I’ve found so far you can make out in the end depending on your tax rate at the time.  Real property depreciation unrecapture is actually not taxed at your ordinary income rate (depreciation recapture is).  Depreciation unrecapture is somewhere around your capital gains tax rate.  I haven’t gotten a full picture of it as it worms it’s way through SchD and potentially two worksheets.

The point being, if you have a relatively marginal tax rate over the years, the depreciation deduction is saving you from paying that “high tax rate.”  When you sell and pay the unrecapture tax, if it’s around the 15%-20% rate, then you actually make out.

It’s tough because tax laws change over time, but you hold real property generally for an even longer time

should you always claim depreciation?

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