All Forum Posts by: Pavan K.

@Pavan K.

Good Morning Pavan, hope you are well.  I have been a practicing CPA for a little over a decade, focused primarily in the real estate industry.  There's a lot of great comments on this thread here from other investors, but a few points of clarification I would ask:

1. Was the property available and marketed for rent during the calendar year 2024?  This matters as it helps determine the "placed in service" date.  As an example, if you bought the property but put some work/time/money into it to get it before putting it up for rent, the time prior to it being listed for rent would not be eligible for depreciation.  It would have just been held as an investment like you would hold a publicly traded stock.  Based on your most recent response, it sounds like you had it available for rent in 2024 so my advice would be that it should have been placed in service on your 2024 return.

2. Based on your comments, it sounds like your income is likely to high to deduct the loss in 2024 so it may not have had a benefit to you on your 2024 return itself.  I would argue though that not starting depreciation on it in 2024 is incorrect.  As a few folks mentioned here, depreciation isn't optional so if it were to ever be looked at by the IRS, they would say you should have taken 3 months of depreciation in 2024 and even though you didn't, they would treat it as if you got those losses.  Then, as also mentioned here once you sell the property you are subject to recapture on the lost depreciation, even though you got no benefit from it.  Along with that, if you were to rent the property for enough gross rents that you have net income on paper before the depreciation, any built up losses in prior years can be used to offset income in a current/future year i.e. if you had depreciation in 2024, didn't use it and then carried it to 2025 where you had net income, that "carried forward" loss would reduce your taxable income in 2025.  It would eventually get "recaptured" if you sold, but you get the benefit in the present with the downside being at a future date.

Overall, I agree with the sentiment of this thread and would say that depreciation really should have been taken on your 2024 return, and if it were me my next step would be to file the Form 3115 in 2025 and pick up the "lost" depreciation from 2024 so at 12/31/2025, you're back to where you should have been.

Feel free to shoot me a direct message if there's anything I can help clarify, happy to help.

- Matt

@Pavan K. Depreciation isn’t optional, it’s required by the IRS, and not claiming it means you pay more tax now while still facing depreciation recapture (up to 25%) when you sell, even if you never took the deduction. On a $600K property, you’re likely missing out on $18K+ in annual deductions, which could save you $6K+ per year in your 32–35% tax bracket. You should ask your CPA why they advised against it, whether they’re aware of IRS recapture rules, and how they justify not using depreciation to offset rental income. Also ask if you can file Form 3115 to begin depreciating this year and catch up missed deductions. If their reasoning doesn’t hold up, it may be time to reconsider your CPA.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Several notes: 

1. $50k land value on a $600k property sounds very low / possibly incorrect 

2. That price for a cost segregation study is on the high end for a single family home 

3. "I would need to get a cost segregation study done  in the first place" Need to get it done for what? 

4. Without a cost segregation you depreciation the building value of your property across 27.5 or 39 years. It's not required in any way. 

With a cost segregation study your building value will be broken out into many detailed components which will have lives of 5,7,15 and 27.5/39 year  lives instead. Allowing you to accelerate some of the depreciation. (and utilize bonus depreciation on the assets with lives of 20 years or less)

5. Possibly most important: can you utilize any losses generated by the rental property? Or will you be subject to the passive loss limits? 

Without a specific use for losses generated; utilizing a cost segregation study to generate large losses you can't use won't benefit you. 

- Are you or your spouse an IRS real estate professional? 
- Is this a Short-term rental? 
- Do you have other passive income sources? 

-Is your Adjusted gross income under $100k which would allow you to use some amount of passive losses?

Why would you ever consider taking a listing down when it’s not renting? You are losing thousands of dollars a month in potential rents and actual expenses. Vacancy is the biggest killer of profitable rentals.You’ll never be able to get it rented if it’s not listed. It is better to lower the price and shift the lease ending date late spring.