Is Depreciation Really A Benefit to Rental Investor Or a Trap

[Pesi S.]

Hello,

Depreciation is touted as one of the big benefits of buying investment real estate (rentals) . I am not able to understand the benefit of taking depreciation on a rental property. On one hand IRS rules force you to take the depreciation every year and on the other hand when you sell the property all the depreciation you took gets added to your income and you get taxed at 25%. So what is the big benefit here ?. In fact its a nasty surprise to pay a huge tax bill.  if you  never sell and pass it on to your heirs as step up then it might benefit but if someone wants to just sell and get out of rental business (not do a 1031) it seems like a huge trap.

e.g. Lets say I buy a rental property for $100K and building is valued at $80K. Lets say I take 2K depreciation every year for 10 years. So on total of $20000 of accumulated depreciation over 10 years I save tax = 20000*25/100 = $5000 (say I am in 25% tax bracket). 

Now when I sell the property, the $20000 in accumulated depreciation gets added to my income and I now have to pay tax of 20000*25/100 = $5000 tax on it (25% tax bracket). So whatever $5000 I saved over 10 years in one go I am asked to pay back. Unless I am missing something, what did I really gain here ? A big chunk of your profit will go into paying this if one hasnt kept aside money every year to pay back this depreciation.

Appreciate if anyone can provide insights on this.

Thank you