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| Depreciation question |
| Posted by: JTT |
| Date: July 27, 2005 06:13:54 AM |
| As a person thinking about buying a first rental property, I don't understand the benefit of depreciation when, as I understand it, I'll have to "recapture" it when I sell the property?? |
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| Re: Depreciation question |
| Posted by: Ed |
| Date: July 27, 2005 10:48:25 PM |
| You can depreciate the property, but not the land. So let's say the property has a value of $100k. If it is a residential rental, you can depreciate it over 27.5 years. This allows you to deduct roughly $3,636 every year that it is a rental on your Sch. E for tax purposes. You deuct your income or loss on your income tax return (to the extent allowable - depends on your income). The depreciation reduces your basis in the property. When you sell the property you must "recapture" the depreciation taken in prior years and pay tax at 25%. The benefit to this is that you take current deductions for the deprreciation on your taxes NOW, and don't have to pay the recapture taxes until you sell your property - when you sell is controlled by you. If you sell as a 1031 exchange, you don't have to pay the tax until you decide to sell in a taxable sale. The "benefit" is the timing. You get deductions now, and don't have to recapture the tax until you sell. |
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| Re: Depreciation question |
| Posted by: DH |
| Date: July 28, 2005 12:11:31 PM |
| Good points Ed. Some other advantages include:
If the owner dies, heirs receive a stepped up basis and don't have to recapture the previous depreciation. While there could be estate taxes, that would still be true without depreciation and estate taxes won't be an issue for smaller estates.
So long as there is inflation, recapture tax will be paid with cheaper dollars. For example, if an owner writes off $1,000 in 2004 and inflation is 3 percent per annum, then paying the recapture tax on that $1,000 in 10 years means that the tax will be paid with dollars worth only $737 in terms of 2004 dollars.
Getting deductions now that aren't taxed until sale also has the benefit that the tax savings can be invested to produce additional cash flow or future capital gain. |
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| Re: Depreciation question |
| Posted by: mike |
| Date: September 03, 2005 05:59:34 AM |
| "However, you cannot exclude the part of any gain equal to any depreciation deductions allowed or allowable after May 6, 1997."
Thats from irs pub 523. That means when u sell u have to recapture the depreciation whether u took it or not! so u might as well take it. |
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