Depreciation: Do or Dont?

[Christian Leon]

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!

[Kevin Sobilo]

@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.