Depreciation Carryforward vs Standard Deduction

[Gagan P.]

Just had a random question pop up into my head.

Given that the IRS requires depreciation to be taken each year, what if a person's only income is rental income, and the AGI, is below the standard deduction amount. Can the depreciation just be carried forward instead? Or does it need to be applied until income is zero?

Example:

Net rent is $10,800

Standard Deduction (using 2023 number) is $13,800

Depreciation is $5,000

Does the depreciation need to bring the Net Income down to $5,800, OR can the standard deduction be used, and carry the depreciation forward?

I'm guessing the former, so the IRS gets more money in the end, but the latter makes sense since the depreciation didn't actually reduce taxable income in the year it had to be applied.

Thanks :)

[Michael Plaks]

@Gagan P.

Actually, your "random" question is a good one. Unfortunately, you're required to take depreciation even if it creates zero benefit to you. As in your case: if your taxes were already zero, you're essentially "wasting" depreciation by taking it in the same year. But you cannot "hold onto it" and apply it when it's beneficial, sorry.

By the way, you misquoted the IRS. What they say is that you must recapture all depreciation at the time of sale, both "allowed" (actually taken) and "allowable" (what you could have taken but did not). The result it that you don't benefit from NOT taking depreciation, in most cases.

What you want to do under the circumstances is to minimize current depreciation by electing the slowest available method and by allocating as much as possible to land.