How Can I Take Advantage of Depreciation?

[Harry Campbell]

So I rented out my condo last July and I'm starting to look over my tax documents in preparation for filing. I've done a lot of research over the past couple days but to my understanding since I make less than 100k AGI, I can deduct up to 25k in passive losses from my W2 income.

That almost sounds too good to be true though since I'll be close to 75k AGI this year putting me in a marginal tax bracket of 25% fed, 9% state, plus fica/med, etc. I understand I'll have to pay back 25% in depreciation recapture when I sell but still 15 cents on the dollar plus all that time of tax deferral sounds pretty awesome - how did I not know about this haha?

I charge my tenant 1900/mo for rent and my expenses are as following: 550/mo for interest, 300/mo for prop taxes/insurance and 400/mo for HOA. I know the basic formula for calculating depreciation, but I haven't looked into it too much yet. I bought the place for 280k, put in about 10k worth of repairs and redfin tells me the land value is 180k(which seems absurdly high). So depreciation would be 290-180 = 110k. 110k/27.5/12 = 333/mo in depreciation.

So that's 1583/mo in expenses/depreciation which obviously wouldn't create a passive loss since my rent is 1900/mo but I spent $3,500 last year on a new A/C and dishwasher. So I had my place rented for 6 months and made $1902($317*6 months) but after the $3,500 in expenses I lost $1,600 on the property.

In my scenario, wouldn't it make sense to get my depreciation as high as possible since this is a phantom expense. My property will still be cash flowing every month but if I can increase my depreciation/month and get as close to 25k in passive losses I'm guaranteeing myself 15 cents on the dollar plus tax deferral.

Another idea I had: I don't want actual expenses but wouldn't it make sense to do a lot of repairs/fixes while I have the place rented out. For example, if I wanted to put in new floors, new carpet, etc wouldn't these all count as expenses and I would get basically a 40% discount off these expenses(until I hit the 25k limit) since it would be reducing my taxes at my marginal rate.