Discussion Archives:Rental Property Depreciation Beneficial or not?

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Discussion Forum Index --> Advanced Tax Questions --> Rental Property Depreciation Beneficial or not?


Discussion Forum Index --> Tax Questions --> Rental Property Depreciation Beneficial or not?

Vijayacpa (talk|edits) said:

1 April 2011
I have clients who take depreciation for rental property. My question is it really beneficial at all because when you sell the property you will end up paying capital gains on the sale price less the depreciated value.

More so in cases of rental loss which gets phased out by AGI.

Thanks,

CathysTaxes (talk|edits) said:

1 April 2011
Beneficial? Maybe, but I do believe it is required. However, if the clients have cash flow problems from the rental, the depreciation can cause it to be a loss and if they actively participate, then they can write off the loss, so it may be beneficial. Also, the capital gains income isn't ordinary income, so wouldn't it be taxed at the capital gains rate which is lower?

Spell Czech (talk|edits) said:

1 April 2011
You will "end up paying capital gains on the sale price less the depreciated value" (as you say) whether or not you claim the deduction for the depreciation against the rental income. Not claiming this deduction is a losing proposition.

This might should be a Yellow Box question...

Vijayacpa (talk|edits) said:

1 April 2011
would you not pay tax on sale pricess less cost basis if you do not claim depreciation?

MizzTiger (talk|edits) said:

1 April 2011
You have to recapture depreciation "allowed or allowable".

Okie1tax (talk|edits) said:

1 April 2011
I think if you check it is Sales - Adjusted Basis

Solomon (talk|edits) said:

1 April 2011
See ยง1016(a)(2).

Alexander15 (talk|edits) said:

1 April 2011
MizzTiger nailed it. Form 4797, used when the property is sold, specifically includes "depreciation allowed or allowable." I have also seen situations where the IRS has recomputed the gain to take depreciation into account.

On the other hand, I have talked to preparers whose clients want to believe that depreciation is optional. It's not. And as others have noted, there are often current year benefits to taking depreciation without regard to any eventual recapture.

Spell Czech (talk|edits) said:

1 April 2011
"On the other hand, I have talked to preparers whose clients want to believe that depreciation is optional."

And I have had clients who fervently believe that the earth is flat.

It is clearly time for a/another beer.

Vijayacpa (talk|edits) said:

2 April 2011
Just read a few things which did confirm that we would need to pay taxes on the depreciation recapture whether or not you claim depreciation. So all well claim it and take the unused losses when you file the taxes.

http://taxes.about.com/od/capitalgains/qt/recapture.htm

http://www.taxinfoblog.com/2007/02/is_depreciation.html

Spell Czech (talk|edits) said:

2 April 2011
Please don't call this "depreciation recapture."

The term "depreciation recapture" has already been used already and it already has another meaning already. At least one other meaning, maybe more...!

Vijayacpa (talk|edits) said:

2 April 2011
Is there a specific percentage to separate land vaue and the cost of the building?

Belle (talk|edits) said:

April 2, 2011
You would generally use the property tax statement allocation, unless you have some reasonable basis for a different allocation.

There's no 'standard' percentage, as the allocation depends on the facts & circumstances specific to property in question.

Vijayacpa (talk|edits) said:

3 April 2011
Ok...so if the assessed value is more in the statement (For example a house purchased for 375k has an assessed value of 450k in the property tax statement) then use the percentage from there correct?

MilTaxEA (talk|edits) said:

3 April 2011
No, the county taxes will have an amount allocated to the land and to the building. For example, a $100k property may have $25k allocated to land and $75k to the building for real estate tax purposes. You would use a 3:1 ratio of building:land to determine their basis for depreciation (lesser of FMV or adjusted basis minus land value).

Vijayacpa (talk|edits) said:

5 April 2011
Thanks but in states like Arizona where the allocation of land and building value is not available, how do you allocate?

Fsteincpa (talk|edits) said:

5 April 2011
Use common sense. If it is a 2 acre lot, how much would a 2 acre of undeveloped land cost.

No need to over complicate.

KCPA (talk|edits) said:

6 April 2011
There is nothing more uncommon than common sense.

Barry Manilow (talk|edits) said:

6 April 2011
15% Land

85% Building

Barry Manilow (talk|edits) said:

6 April 2011
15% Land, 85% Building if it's a home (for home office or Sch E Res Realty)

5% Land, 95% Building if it's a Condo (for home office or Sch E Res Realty)

MilTaxEA (talk|edits) said:

6 April 2011
I wouldn't use a flat percentage to allocate land to building. For instance, I had a rental home the other day that was waterfront property. The building was worth $200k while the land was $300k. I'd do like Fsteincpa recommends, look at comps for undeveloped land.

MWPXYZ (talk|edits) said:

6 April 2011
If the lessee was required to "return" the property in as good a condition and value as when it was leased, the lessor may avoid depreciation. There were some railroad cases in the 1920's and 1930's on this issue. Rev Rul 62-8 refines the issue. From what I have read, Section 168 deductions are similiarly limited as Section 167 deductions were/are.

But considering the preferential capital gains treatment, even with the potentially higher rate on past depreciation; it seems that you would have to KNOW that a future sale of depreciated property (v. undepreciated property) would create a higher tax. And there may be state tax issues to consider.

Proptaxguy (talk|edits) said:

6 April 2011
I'm not sure if you checked the actual Arizona county website you are discussing, but some counties I know have this information.

Spell Czech (talk|edits) said:

6 April 2011
If you want to avoid claiming depreciation, just let the total basis be land and let the building have zero basis.

This is not as outrageous as you think it is! There are oceanfront properties on the Atlantic Ocean - I'm not familiar with the Pacific but I would suspect... - that will sell for the same amount, *with or without* the house that is presently on them. Land = 100%, House =0%. Go figure.

Vijayacpa (talk|edits) said:

11 April 2011
Thanks for all the input....I took 80:20.


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