I claim depreciation on my rental property?
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.
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.