Structure depreciation required or optional?

Question

So i understand you can record the structure portion of the property as depreciation as a paper expense. But do I have to? I expect the cash flow to be so small that taking the depreciation makes no difference. If I dont take depreciation, when I sell, I can claim the whole thing as my basis, correct?

And, if i have multiple properties, do I have to take depreciation on all of them or can i selectively choose which one to take?

And, if i have multiple properties, do I have to take depreciation on all of them or can i selectively choose which one to take?

Bill Hampton · Answer

Mark, the IRS is going to tax you as if you took the depreciation, so you should take it.

Depreciation is tax deduction that helps your bottom line. If you don't take depreciation you are paying thousands more in taxes on each property.

I recommend finding an accountant that specializes in real estate taxation. You may want to consider working with your accountant remotely to expand your options.     I would also recommend looking for a tax strategist who is willing to work with you throughout the year, not just when preparing your tax return. You want an accountant that can help you strategize and who is responsive when you want to know the tax consequences of the decisions you are making throughout the year.Good luck and let me know if I can be of assistance.

Bill Hampton · Answer

Michael,

It's called depreciation recapture.

If you are not taking depreciation you need to hire an accountant to file for all of the missed depreciation asap.

You are leaving thousands of dollars on the table.

Good luck and let me know if I can be of assistance.

Bill B. · Answer

You don’t “have to”. But when you sell the IRS will tax you 25% of the amount you could have whether you did or not. So I would suggest you do take the expense.

Wayne Brooks · Answer

@Michael Plante Your depreciation is about 3% of purchase price/ year (structure value divided by 27 1/2 years)....so in your $100,000 example about $3,000/yr. When you sell, in say 5 years,  you pay ordinary income tax on this $15k, up to 25% max. Depreciation is essentially an interest free loan. Do claim it though, it will offset some of your rental income each year and even if you can’t use it all, it helps in the end.

Wayne Brooks · Answer

@Michael Plante A “justifiable way” to determine values would be percentages of value on the county Propeety Appraiser site  land and mobile home, assuming the mobile home is “attached” to the land.

Michael Plante · Answer

I sell in a year sometimes  less so maybe it’s different than people who hold

Joe Splitrock · Answer

You always want to depreciate and take any expense you can with the goal of having a tax loss. Tax loss doesn't mean you won't have money in the bank account at the end of the year. Of course if you sell, there may be a tax bill. If you are concerned about that, set aside profits in a bank account. Hiring a PM is fine, but that will generate more expense.

My first few properties, I always generated a tax loss every year. The longer I am in this business, the harder it is to generate a loss or even avoid taxes. It is the "curse" of being successful in business, which I am ok with. My point is be happy you have expenses and happy if you have a loss. Depending on your income level, you can either take that loss against regular income or carry it forward for future years where you are more profitable.

Mark Ham · Answer

@Joe Splitrock

Right.  I misused the term cash flow vs profit.  Profit should not include the principal portion of the mortgage.  cash flow is small, but a decent profit.  Insurance is high, there is HOA, and this property is in texas so i have high tax amount too.  And i am considering hiring a PM.  Thats why.

Joe Splitrock · Answer

You refer to depreciation as a "paper expense" but depreciation is actually a real expense. It is the expense of acquiring the property which is the largest expense you will incur in the rental business. Depreciation is just the government forcing you to spread the expense out over a period of time that they call useful life. That is not necessarily the actual life of the item in many cases.

When you make the statement, "I expect the cash flow to be so small", that leads me to believe you are not claiming income and expenses properly. One mistake I see people make is claiming their mortgage payment as an expense, which is why they conclude their cash flow is low. Your mortgage payment is not a business expense. Only the interest and insurance portion of a mortgage payment is an expense. The equity portion of your payment is not an expense. Think of depreciation as how you claim the equity portion of your property.

Maybe you can explain to us why your cash flow is low and what expenses you are claiming. I fear you are making some major tax mistakes here. Have you considered hiring a tax professional?

Bottom line is that you need to establish basis and claim deprecation for any property you rent out. If you don't know how to do those things, get a tax professional to help.

Joe Splitrock · Answer

This sounds to me like you may have to pay short term capital gains in some situations, where you are holding less than a year. Based on statements you are making, I would use a tax professional to help with filing taxes.

Structure depreciation required or optional?

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