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Must I claim depreciation on my rental property?

Dear Tax Talk,

Am I required to claim depreciation on my rental property? I'd rather not claim depreciation since, accordingly, I do not want the sale to result in depreciation recapture. Thank you for your input.
-- Ron



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Dear Ron,
Sorry, but you don't have a choice in the matter. Recapture isn't really as bad as you may think. Depreciation is an annual deduction representing a method for recovering your investment's cost. Depreciation is calculated on the portion of your investment that represents the cost of the building. No depreciation is allowed on the land costs of the rental property. A reasonable allocation should be made between the two.

Depreciation on residential real property is computed on a straight-line basis over 27.5 years using a midmonth convention. A midmonth convention allows you one-half month's depreciation for the first month the property is put in service, regardless of the day in the month it is placed in service. For example, if you buy the property on April 30 in rentable condition, you'll be allowed eight and a half months' depreciation for the year. Since 27.5 years represents 330 months, you'll receive 8.5/330 of the building's cost in depreciation in the first year and 12/330 each subsequent full year the property is used as a rental.

Recapture occurs on the sale of the property. The maximum amount of recapture is the amount of depreciation claimed or the amount that should have been claimed. That is, recapture occurs even on amounts that you failed to claim on the property. Recapture can be less if the selling price is less than the original cost of the property. The selling price allocated to the building might be less than the original cost if the building was destroyed or if it will be demolished in the sale. Depreciation recapture is taxed at a maximum rate of 28 percent, but can be less, depending on your level of income. Any gain beyond the original cost of the building is taxed at the maximum rate applicable to long-term capital gains, which is currently 15 percent.

Bankrate.com's corrections policy
-- Posted: June 1, 2005
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