Do I have to to take depreciation - Posted by Pradeep Rijhwani

Posted by Patrick S. Lawson on April 10, 2006 at 11:41:16:

As I understand the current tax law you do not have to take the depreciation, but it will be recaptured when you sell the property.

Do I have to to take depreciation - Posted by Pradeep Rijhwani

Posted by Pradeep Rijhwani on April 10, 2006 at 10:43:51:

Friend of mine told me that I have to take depreciation on the two condos that I own and use as rental properties.

According to tax code 527 it looks like I am forced to take the depreciation even though I do not want to for reasons of Alternative Minimum Tax and depreciation recapture.
http://www.irs.gov/publications/p527/ar02.html#d0e2438

Any suggestions of how I can not take depreciation so I am not hit with the depreciation recapture when I sell the properties.

Re: Do I have to to take depreciation - Posted by Frank Chin

Posted by Frank Chin on April 10, 2006 at 16:31:33:

Pradeep:

David gave you a good answer. Here’s another angle.

You depreciate the structure, and not the land. So, allocate as much as you can to the land, say 50%. You don’t depreciate land. Is the IRS going to argue about the “land vs building” ratio with you?? Probably not. They look for people who “overdeduct”.

If you have a condo worth 100K, allocate 50K to the structure, and depreciate it for 100 years as David suggests. You’ll do about $500.00 a year in depreciation. After 20 years, you depreciate only 10K, with recapture of only $2,500. By then, the value should’ve gone up several times already.

Good enough??

Frank Chin

Yes AND no… - Posted by David Krulac

Posted by David Krulac on April 10, 2006 at 14:30:41:

  1. If you don’t take depreciaiton, when you sell you will still have to pay depreciaition recapture on depreciation taken OR allowed. The current Federal recapture rate is 25% tax.

  2. The IRS code says that the MINIMUM depreciation shcedule for residential is 27.5 years. The IRS has no problem with you taking a LONGER depreciation schedule say like 50 or 100 years. You can pick the lengthy schedule and as long as you are more than 27.5 years residential, you’re good to go.

  3. Since the long term capital gains rate is only 15% for most people and recapture is 25% for everybody, by reducing your depreciaiton you are reducing your tax load by 10%. It a paln that can work, even though most people try to go the other way and depreciate as much as possible, whereas you are trying to depreciatie as little as possible. This can work if you don’t need the depreciaiton or if you are planning on selling sooner rather than later and want to reduce your taxes.