Waiting to depreciate rental property
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?
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.
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.
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