For starters, long term residential rental real estate does not qualify for SEC 179. Commercial real estate "can" qualify, but only if your rental business rises to the level of being your primary trade or business (primary source of income).
Rental income is passive income. Therefore the related expenses are also passive. Your passive expenses/losses can only be deducted from that passive income.
So if the rental only produced $30K of rental income during the year, once your deductible rental expenses reaches $30K, that it's you can't deduct any more. (There is an additional $25K allowed against "other" ordinary income under certain conditions. But I'm not going to complicate things with that right now.) Any additional losses in excess of the rental income are just flat out not allowed and get carried forward to the next year.
Now when it comes tax filing time it is *NOT* *COMMON* for rental real estate to actually show a profit "ON" "PAPER" on your tax return. it is much more common to show a loss in excess of the rental income every single year. That loss in excess of the rental income gets carried forward to the next year. So with each passing year your losses carried forward will continue you grow larger.
IN the tax year you sell the property, all of those carry forward losses can be claimed and realized in that tax year. But here's the issue with depreciation.
Depreciation is *NOT* a permanent deduction. Depreciation merely reduces your cost basis in the property. In the tax year you sell the property you are required by law to recapture that depreciation and pay taxes on it. The recaptured depreciation also adds to your AGI for that tax year and can easily bump you into the next higher tax bracket. But the recaptured depreciation itself will be taxed at a maximum of 25%.
So if you qualify to take the SEC179 deduction on your commercial real estate and actually take it, then you are effectively reducing your cost basis in the property to "ZERO". So if in ten years you sell the property, you will be taxes on *every* *penny* of your sales price, as your effective cost basis will be ZERO.
So I highly recommend you leave will enough alone and do "NOT" take the SEC179 deduction. It *will* bite you in the year you sell the property if you do.
