Depreciation: Do or Dont?

Question

Hello all!

First tax season with my rental property and my CPA is asking me if I want to claim the depreciation on the rental or not. I know if I do I'll get more money back now, but then I'll have to pay the taxes on it later as it gets added to the overall price at the time of sale? Are there any other pros/cons for claiming depreciation? Any advice is welcome. Cheers!

Aaron Zimmerman · Answer

You are required to take the depreciation. If you don't, upon sale, you will need to recapture the amount of depreciation that SHOULD have been taken (not what was actually taken).

Kevin Sobilo · Answer

@Christian Leon, the financial answer is YES! Consider the time-value of money. The money you DON'T pay in taxes today can be put to use earning you even MORE money over time. Depreciation is a big perk for real estate investing.

Also, consider the control you have for WHEN you may any taxes down the road. You can choose to sell a property and pay the taxes during a year when you have less income and are in a lower bracket, or just before tax rates are increased.

You can also do 1031 exchanges into new investment properties further deferring taxes. You can also use that to reinvest part of your taxable proceeds while paying tax on a smaller portion within your control.

Finally, under current laws, your heirs inherit the property at a stepped up basis of fair market value when its inherited. So, if they sell it then they do not have to pay those taxes you have been deferring. This may change in the future if the laws change, but that is the way it is now based on my understanding.

Wayne Brooks · Answer

@Christian Leon There is a disconnect here....as @Aaron Zimmerman mentioned, you have no choice....when you sell you Have to recapture how much the depreciation Would have been, whether you claimed it or not. So either you misunderstood something (most likely) or CPA doesn’t know the basics.

Jonathan Pavkov · Answer

@Christian Leon - depreciation is one of the ways Real Estate is so attractive. You can have positive cash flow, but negative income based on depreciation. Great for tax purposes!

And yes - find a new CPA.

Joe Splitrock · Answer

Option C: Fire your CPA and get a new one. This isn't a valid question. You always claim depreciation for the structure. You are required to recapture depreciation when you sell, regardless of if you claimed it on your taxes. This is such a basic question that your CPA got wrong, that it tells me they are making other mistakes too.

Jonathan R McLaughlin · Answer

@Christian Leon they may be talking about when the property was placed in rental service and you may have options which has tax implications—not sure of effect on depreciation schedule. Check in before assuming they don’t know

Christian Leon · Answer

Thank you all for the input! My CPA is good at my complex finances for my deployable job, but I see not so much with real estate. I will be looking for another that specializes in the real estate field. Cheers!

Bill B. · Answer

I HOPE you are lying and didn’t ask your “CPA”. Rather you are doing your taxes yourself with some software. This is a VERY BASIC question. As mentioned above. If you do not claim depreciation you will still be taxed on the depreciation you could have taken. If you are relating a true story you need to IMMEDIATELY find a new tax guy

It’s basically the government saying you can claim an additional 3.6% of your property’s  improvement’s value as a phantom expense and pay 25% tax on that amount when you sell. Of you can not take that phantom expense and then pay 25% tax (depreciation recapture) on the amount you could have taken.

So you can borrow from the government at a flat 25% rate for as long s you own (or zero if you die owning the property) or you can pay approximately 1% of your property’s improvements value in additional tax every year because you love paying taxes.

Depreciation: Do or Dont?

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