When to Start Depreciating Properties? Pros and Cons?

Question

Good morning all! Had a quick question about when to depreciate SFH rentals which we are currently buying and holding long term.

My wife and I are on contract for our 4th property (2 with a mortgage) and we've been asked by our CPA if we want to depreciate our properties on our taxes.

My question is when is a good time to consider depreciating rentals or even our primary residence (which we have 1/3rd of the house as an Air bnb)? Things that we are trying to consider are:

• The ability to obtain a loan in the future (lower AGI from depreciation might hurt us) and recapture taxes

I figured that if we sell an investment property, we would likely reinvest via a 1031 to defer our taxes, but would love some opinions on others that have gone through this and might be able to share their experiences for setting up a good foundation.

Thanks so much in advance! Cheers!

Natalie Kolodij · Answer

This is an easy answer-

You start depreciating it as soon as it's in service as a rental

It's not something you get asked if you WANT to do

You should find a new tax professional.

Depreciation is not optional. It's allowed or allowable which means if you don't depreciate it...when you sell...you're taxed as though you did.

Linda Weygant · Answer

Chiming in to agree with @Natalie Kolodij.  You need a new tax professional.  You don't get to choose if or when you depreciate your income producing assets.

Any mortgage underwriter worth their paycheck knows that they would add the depreciation back in to get the real profits of the rental, so that should not come into play at all.

Natalie Kolodij · Answer

So in shot- there is nothing to consider- it's a requirement and if you haven't been doing it you should find a tax professional to correct it via amendment or 3115.

And also worth noting- lenders will add back depreciation for income purposes

Natalie Kolodij · Answer

Yes.

Any exclusive business use/ rental use square footage.

So if your house is 1,500 square feet and the 2 air bnb bedrooms and their dedicated bath are 500 then 1/3.

You can't depreciate share spaces like kitchen/living.

Basit Siddiqi · Answer

@Bobby BalowYou want to look at Form Schedule E - Line 18(or line 14 if you filed form 8825).If depreciation line is blank you must fire your accountant. This is very negligent when preparing a return for a real estate investor.The good news is that you get to claim the depreciation you missed in past year.The bad news is that the form to do so is difficult and will show up in the cost when you work with your new accountant.Good luck on selecting your new accountant.

Bobby Balow · Answer

I'm really glad I posted this! @Natalie Kolodij does this depreciation also apply to our primary residence where 1/3 of it is used as an Air bnb?

Steve Morris · Answer

Not clear on why your accnt would ask about depreciation.  You need to take it over a 27.5 year schedule on investment property.

When you sell (IF YOU DO NOT DO A 1031 TAX-DEFERRAL), you'll need to recapture the depreciation you took at a 25% (someone can correct me) rate.

Some capital expenditures (i.e. things you can't expense), you can do a cost segregation and depreciate them faster, but that's a CPA question.

The idea with depreciation (and mortgage int deductions) is to tax-shelter your income.

Why depreciation?  If you pay $1M for a building improvements (you can't depreciate dirt), they won't let you expense that all at once and force you to take it as a "cost"  spread over 27.5 years (approx. $36.5K/year offset against income).

When to Start Depreciating Properties? Pros and Cons?

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