Rental property - depreciation

[isukendall]

Seeking some tax advice from the general CF public. Yes, I realize it is late in the game, but just trying to further my understanding.

Wife and I bought a townhouse in 2008 for $133k. Lived in it until this summer, and bought and moved into an upgrade house, but kept the townhouse for a rental property. About a year before we moved, we refi'd and had an appraisal at $154k. Could probably sell now for $180k (hot market in northern CO) but no official appraisal. Rent grew along with housing values, so we're keeping as a rental place since our rent income is greater than our mortgage. Our long-term plan is to roll the place into a vacation home of some type, but well down the road (10+ years). I live 1/4 mile from the rental and take care of repairs myself.

We have our taxes pretty much done, but this is the first time we've done it with a rental property. I've done TurboTax in the past, as our taxes were pretty straightforward. I've been looking into depreciation, and have some friends who have done it in the past with rental properties. I can't yet see the advantages either way, whether to claim depreciation or not. Seems like it's a debate between paying more taxes now, or a ton of capital gains tax when we sell it, right?

Another question is: can we wait until the next year to start depreciating? My impression is that once you start, you are locked in to depreciating every year.

It's obviously late in the tax game to get a professional involved, so I'm inclined to just pay up this year and look into it next year. I could try to do it myself this year on TurboTax, but scared of screwing something up. Any advice from others who have had rental properties?

 

[BCClone]

You can slide it back if it was put in service as a rental late in the year.

Generally capital gains taxes are less than normal income, so you can save the difference.

 

[IcSyU]

You can slide it back if it was put in service as a rental late in the year.

Generally capital gains taxes are less than normal income, so you can save the difference.

It would be 1250 property subject to depreciation recapture and because a rental property is mid-month convention the depreciation should start based on FMV at the conversion date over 27.5 years.

I think the 1250 recapture is a max 25% rate but could be wrong on that. Most people aren't paying 25% in taxes so there really isn't "savings" by not depreciating it.

 

[isukendall]

English, guys. Remember - I'm asking because I don't understand it.

 

[IcSyU]

English, guys. Remember - I'm asking because I don't understand it.

The building is 1250 property and when you sell it, you'll recapture any depreciation taken at a 25% tax rate max, not capital gains. The capital gains would be anything in excess of the original basis.

The original basis would be whatever the FMV was at the date of conversion. That value should be depreciated over 27.5 years starting in the month it's converted.

Pro tip: whatever you decide is the FMV at conversion, split it into components of land and building according to the ratio it's assesed at. When you sell it any gain on the land will be capital gains instead of ordinary income. The land is NOT depreciated.
Ex. Land assessed at $100, $20 to land, $80 to building. FMV is $125. Use $25 of land and $100 of building. Depreciate the building over 27.5 years.

Sell it all for $150.

If you took $25 in depreciation, you'll pick that up as recapture at your ordinary rate or 25%, whatever is lower. Whatever is allocated to the building sale above the original basis is at capital gains.

Whatever you allocate to the sale of the land will be picked up at capital gains rates.

 

[cyclone83]

My good friend Andy Dufresne could probably help you out. He has a little place down in Mexico on the Pacific coast. First questions he will probably ask you is do you trust your wife?

Regards,

Red