Do I count depreciation tax shield in my cash flow analysis?

[Jeff Wang]

Hello,

I've modeled my investment property cashflows in excel. In my model, should I be counting the depreciation tax shield as cash flow? Logically, it seems like it is cash flow since it is indeed, cash in my pocket. I plan to use the depreciation cash flow in other investments of stock or real estate.

Finally, if I move back into the rental property for 2 years, can I avoid depreciation recapture using the $250k tax exemption on sale of owner occupied homes?

Thanks

[Jeff Wang]

That is a useful article but it doesn't talk about depreciation recapture. It did link to the IRS website and it appears you cannot avoid depreciation recapture using the personal gain exemption ($250k):

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Sale-of-Residence---Real-Estate-Tax-Tips

Example:

On May 30, 1997, Amy bought a house. She moved in on that date and lived in it until May 31, 1999, when she moved out of the house and put it up for rent. The house was rented from June 1, 1999, to March 31, 2001. Amy moved back into the house on April 1, 2001, and lived there until she sold it on January 31, 2003. During the 5-year period ending on the date of the sale (February 1, 1998 - January 31, 2003), Amy owned and lived in the house for more than 2 years as shown in the table below.

Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed for renting the house.