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George Saenz, the Bankrate.com Tax Talk columnistWaiting to depreciate rental property

Dear Tax Talk,
My husband and I just purchased our first home, which is actually a duplex. We think it may be better to wait on depreciating the rental side until we are in a higher income tax bracket, as right now our capital gains tax is only 5 percent. Does that seem logical? And if we do not depreciate, can we write off all of the repairs on the rental side?
-- Margarette

Dear Margarette,
It definitely seems logical, but it's not allowable. Depreciation is an annual allowance for the cost of long-lived property used in producing income. The amount of depreciation allowed depends on the cost of the depreciable asset and its nature.

Residential rental property is depreciated over 27.5 years on a straight-line basis. Straight line means that you'll claim the same amount of depreciation annually with an adjustment in the year of purchase and sale to take into account the number of months you owned the property in those years.

IRS Publication 946 explains how to depreciate property and provides tables to take into account the annual amounts and the purchase and sale years. You can also use the publication to find out how to depreciate property associated with the rental, such as furnishings, appliances and landscaping.

When you sell property that has been subject to the allowance for depreciation, you have to figure your adjusted basis. Your adjusted basis is generally your cost plus improvements, less the amount of depreciation allowed or ALLOWABLE. Hence, if you did not claim all the depreciation you were entitled to, you still have to use the amount that should have been claimed as an adjustment to your basis.

You might pay tax at a higher rate on the amount you claimed as depreciation than the rate that applies to gain in excess of the cost of the property. This is known as Section 1250 depreciation recapture. Currently, the maximum rate on straight-line depreciation recapture is 25 percent, whereas the maximum on long-term capital gains is 15 percent. The maximum rates might not apply in the year of sale, depending on your income.

Depreciation is irrespective of the other rental deductions. That is, whether or not you claim it, it does not affect your other deductions.

To ask a question on Tax Talk, go to the "Ask the Experts" page, and select "taxes" as the topic.

Bankrate.com's corrections policy -- Posted: Sept. 15, 2006
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