These questions are specific to rental properties placed in service after 1987. We assume a 27.5 year, straight line depreciation. I believe
@marcisikoff has a great suggestion and my questions might be related to his/her post.
1) Let's say you have limited income (with an income bracket of 12%). When you sell your house and pay taxes on the recaptured depreciation, you get bumped up to at minimum a 22% income bracket (max 25%) because you had your rental for a long time and depreciated for many years. So, you will pay 22-25% taxes on this recaptured depreciation. **Is there any way to avoid this 22% rate? ** While you rent out the house, can you skip the yearly depreciation, pay your 12% income tax on your rental income profit, then somehow fill out form 3115 to help you avoid paying the 22-25% taxes on the depreciation at sale time?
2) My friend has not been depreciating her rental house and asked me for advice. Her house has been in the rental service for more than 5 years. To minimize having to deal with paying a tax expert multiple times, can she continue to NOT depreciate and when she goes to sell the house, deal with the mess only once, using Form 3115. Notes, she is like me, we both live frugally in the 12% income bracket so there is NO benefit for her to depreciate right now from a tax perspective. I do depreciate.
2b) How confusing is Form 3115 - is this impossible to figure out without a CPA?
3) Capital Gains / 2 out of 5 year rule / Primary Residency question. Are there any gotchas in terms of avoiding capital gains if you live in your rental in the following scenario: 2 years rental, 1 year primary, 1 year rental, 1 year primary? As long as you do this correctly and your gain is less than $250K (single), you should not have to pay any capital gains, correct? Yes, you will still have to pay taxes on the recaptured depreciation.
Thank you very much! Happy New Year.
