Depreciation and tax deduction questions

Homeowner · Member since 2020 · 9 posts · 0 votes

Some questions for investment property:

1) when you buy a house, does the 'clock' on the 27.5 years start over, regardless of when the previous owners bought it?

2) what is a ballpark building vs. land ratio to use when trying to trip out the building value on the overall purchase price (example: if buying a $100k property, what % is typically building vs. land)

3) Can you include improvements/enhancements made onto the building value in depreciation?

Thank you in advance

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Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

Originally posted by @Margaret Jay:

Thank you all. If you bought a property that generates a cash flow LOSS each year, but you realize a capital GAIN upon sale, I assume you still need to calculate capital gain taxes WITH depreciation recapture? i.e the IRS doesn't care how how loss making the property (from a yearly cash flow perspective) when calculative capital gains taxes

You will either get to deduct that loss each year (If your AGI is under $150k)

Or when you sell it those losses generated that couldn't be deducted when your income is too high become available so they'll offset that gain.

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Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
6y
1. Yes
2. You don't have to guess in most cases as your property tax bill will break it down, it varies based on the area so there isn't a nationwide standard
3. Yes improvements get included, additions big capital improvements and the like, but it is actually better to take those as expenses whenever possible.
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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
6y
@Margaret Jay
The 27.5 year depreciation starts when you put the property into “service” as a rental. If the next owner is also an investor, they would start. 27.5 year depreciation schedule when three start their rental. The service period when it’s ready for renting, not necessarily when you get the first tenant to move in.
Lookup your assessed value. It will show land value and improvement value. Use that as your ratio to determine what percentage of your purchase value to depreciate
Any capital improvements that increase the value of the property should be depreciated. You can Google something like “improvements vs repairs IRS” and you should get some nice reading
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Lance LvovskyPro Member
Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
6y
Originally posted by @Margaret Jay:
Some questions for investment property:
1) when you buy a house, does the 'clock' on the 27.5 years start over, regardless of when the previous owners bought it?

2) what is a ballpark building vs. land ratio to use when trying to trip out the building value on the overall purchase price (example: if buying a $100k property, what % is typically building vs. land)
3) Can you include improvements/enhancements made onto the building value in depreciation?
Thank you in advance

1) Yes your purchase price becomes the new tax basis.
2) Depends. Look up how the country property appraiser is doing the allocations. That is a good starting point.
3) Yes.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
It starts at the date it's put into service as a rental. (Based on your ownership)
You'll look at the county assessor or appraisal to figure out land v. building. There is no standard. If high value spots you'll see more value to land- in a more regular area you'll see more value to building. It's very location dependent.
You have to capitalize most renovations- this is where a tax pro comes in handy since there is a lot of potential strategy to apply here.
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Margaret Jay
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Homeowner · Member since 2020 · 9 posts · 0 votes
6y
Thank you all. If you bought a property that generates a cash flow LOSS each year, but you realize a capital GAIN upon sale, I assume you still need to calculate capital gain taxes WITH depreciation recapture? i.e the IRS doesn't care how how loss making the property (from a yearly cash flow perspective) when calculative capital gains taxes
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
Originally posted by @Margaret Jay:
Thank you all. If you bought a property that generates a cash flow LOSS each year, but you realize a capital GAIN upon sale, I assume you still need to calculate capital gain taxes WITH depreciation recapture? i.e the IRS doesn't care how how loss making the property (from a yearly cash flow perspective) when calculative capital gains taxes

You will either get to deduct that loss each year (If your AGI is under $150k)
Or when you sell it those losses generated that couldn't be deducted when your income is too high become available so they'll offset that gain.
Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
Kolodij Tax & Consulting
Website View Page
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Margaret Jay
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Homeowner · Member since 2020 · 9 posts · 0 votes
6y
Natalie, could you please provide an example? it seems as though losses generated from a cashflow perspective can be used to offset capital gains at time of sale? If so, are there limits to how much can be used across a certain time frame?
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