Should I be taking a depreciation on my rental?

[Guevara M.]

I bought a rental (Town Home) back in 2004 & have been taking a depreciation so that I could get a bigger tax return. The CPA that did my taxes this year advised me that I shouldn't be taking a depreciation if I plan on selling (which I do in a couple of years) cuz I will have to pay capital gains on that amount. My goal is to make as much money off it when I sell it so should I stop taking a depreciation? Any advice would be great cuz I don't know much about investing.

Thanks,
-Mike

[Jon Holdman]

This issue has been discussed a few times before. I'll wade in yet again, since I now have a new CPA who seems to actually understand real estate investing.

I assume you are referring to the straight line 27.5 year depreciation that's currently allowed, and not the accellerated depreciation allowed on some properties acquired long ago.

It is my understanding, confirmed by recent and in-depth conversation with my new CPA, that you will have to pay depreciation recapture tax on the amount of the depreciation when you sell the property. Depreciation reduces the basis, and so increases your gain on the sale.

This is different than in another thread where RECPATAXMAN and I discussed this point, and came to the conclusion that the depreciation recapture applied only the accellerated portion. Since accellerated depreciation doesn't apply to properties purchased recently (sincee 1987?), you wouldn't have to pay the recapture tax. According to my new CPA, which has extensive real estate experience, that's incorrect. Yes, there was a recapture tax for accellerated depreciation. Maybe still is, if you have a property under those rules. The recapture for the straight line depreciation is different and does still apply.

Its also my understanding that the basis for your property is reduced by the depreciation allowed, not the depreciation taken. So, doesn't matter whether you take it or not.

I'm sure you'll get other posters with different responses.

Jon