Can you not depreciate for taxes?

[Scott P.]

Hi,

I am trying to fully understand taxation of rental properties before I make my first purchase. The scenario I'm looking at is a buy-and-hold strategy (100% cash) that would generate a moderate amount of income (with no other sources of income). My tax situation varies a lot, but that's the scenario I'm looking at right now.

My understanding is that the highly touted tax benefits of owning rental property boils down to [1] you can write off expenses (but I don't see that as a benefit; I don't think people should pay taxes on money they didn't make), and [2] you can depreciate the property.

In the case I describe, it seems to me that not depreciating might be more beneficial. In 2012, marginal tax rates for <$70K income were 15% (married filing jointly). Using depreciation, you would pay a lot less in taxes today, but would owe capital gains on the depreciated amount in the future if/when selling. So buying a property for $100K today and selling for $150K in the future could potentially cause as much as $150K capital gain (rather than the actual $50K gain).

It's impossible to predict what taxes will be like in the future, but [1] am I right than in the situation described, not depreciating the property might be beneficial (I.E. am I overlooking something obvious?), and [2] is there a way not to depreciate (the IRS says that the basis in the property needs to be adjusted my the allowable amount of depreciation, even if not deducted)?

Thanks in advance for any assistance.
-Scott