Originally posted by @Linda Weygant:
There's really no choice when it comes to taking depreciation on real estate. The IRS has set guidelines for the amount of depreciation to take based on the property type, its use and a couple of other things.
When it comes time to sell, your capital gains and depreciation recapture (for a rental property) are calculated based on the amount of Depreciation Allowed or ALLOWABLE.
This means that even if you didn't take depreciation or you took something less than what you were entitled to take, you still pay taxes for the Depreciation Recapture at the amount that you should have taken.
So you just calculate the proper amount and take it. There's no strategy to employ on this.
Now if you're talking about accelerated depreciation methods for equipment, that's a completely different answer and whether or not to accelerate or not is dependent on a whole host of factors.
I'm going to disagree with Linda just slightly on these points...and it's nitpicking but having 25 years experience in Tax, I've seen a few things...and you need to hire a CPA to discuss them to determine if they are right for you....
The IRS has advised that you can elect to not depreciate anything under $2,500. That's pretty generous. Just because you have the option NOT to depreciate anything under that amount, doesn't mean that you CAN'T depreciate anything under that amount. If you want to depreciate that $900 washer and $900 dryer, then you can instead of expensing it. The key is consistency...the IRS likes consistency.
Your depreciation and "basis" in that depreciable asset could get a bit complicated depending on how you acquired the house, where it's located in relation to your home, and what condition it was in when you bought it. Two examples:
a) If you acquired the house via "Tax Lien", you presumably paid legal fees to an attorney to foreclose on the lien and go through the court process. Say you paid $3,500 in legal fees. That $3,500 in legal fees is not an "expense" that you can deduct on your taxes - those fees are considered part of your "basis" in the property and generally speaking, are pro-rated between the value of the land and the value of the house (say land is worth 20% of the value and the house is worth 80%, then you prorate your basis accordingly). As Linda pointed out, Land is not depreciable, so the the 80% portion is depreciated over the applicable life of the house.
b) Say you buy a foreclosure that needs a ton of work. You have general repairs you make to the house and it's about two hours away from your home so you can are allowed to deduct your mileage in that it isn't "commuting miles". Your repairs are considered "construction work in process" until the house is rented. The mileage you incur driving back and forth to that house is included in the basis of your "construction work in process"....so when you depreciate your asset - call it "Remodel" you must depreciate those miles and include it as a cost of the "Remodel" asset.
Your depreciation recapture and impact at sale will depend on the asset type, and how much depreciation you've taken. This also will affect your year to year taxable income. Generally, a person uses the "MACRS" depreciation method on assets which depreciates assets quicker up front. You can elect to use a slower method of depreciation in order to defer the depreciation expense further over time. This is an old school tax planning method I've seen used MANY times and it's something you need to talk to your CPA about before you elect to do it.
The final thought is we don't know how you hold your property and the information discussed above could be different depending if you are taxed as an individual or single member LLC (that has up to $25,000 in allowable deductions to revenue based on Schedule E rules), or you are flipping on Schedule C, or you are an S-Corp, or a Partnership.
The best is answer is you should consult with a CPA, learn the options, and do what's best for you and your business.
