Important Note on Depreciation

由 miat42 于 2007-03-10 09:02:02

If you don't take the depreciation when you should, the IRS will
assume that you took it anyway. If you ever sell your investment
property, you will have to pay tax on the recaptured depreciation
even if there's nothing to recapture. By not depreciating you will
lose the tax savings while you own the property and you will have
to pay taxes when you sell.

Common Mistake
One common mistake some taxpayers make is that they do not
deduct depreciation on their investment property. If you make this
mistake, correct it immediately by filing to take the past
depreciation with your current tax return. You can amend your tax
returns for the previous there years so that you can depreciate your
properties on those returns (three years is the limit for amending
past returns).

If you are not allowed to make the correction on an amended return,
you can change your accounting method to claim the correct amount
of depreciation. To change your accounting method, you must file
Form 3115, Application for Change in Accounting Method, to get the
consent of the IRS. In some instances, that consent is automatic. For
more information, see Changing Your Accounting Method in IRS Publication
946.


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Again, not a benefit for MAGI > 150K

来源: montavista 于 07-03-10 12:39:33

Take an example:
Assume one couple live on W2 income and are not categorized as real estate investor, so rental income is passive income.

MAGI 150K
Rental income: 15K
Rental Expense: 15K
Cash flow: even
Depreciation: 10K
Paper loss: 10K (from depreciation)

If MAGI < 100K, one can deduct the 10K loss from income. However, for a couple with income >= 150K, they can NOT deduct the 10K from their income. In this case, there is not immediate tax benefit. What's even worse, as depreciation is mandatory, when they sell the house, depreciation has to be recaptured and they have to pay tax on the portion they couldn't deduct from income. It's like paying back the money they never borrow.

This loss will be carried over until one day the rental income increases or expense decreases to result in a positive cash flow to off set the depreciation.

In CA, if a couple have lived in a house for 2 years and the house has appreciated so much, it's better to sell the house to cash out (500K tax free for a married couple) and buy properties in low cost / high potential area. They will be more likely able to find positive cash flow properties to take advantage of depreciation.