I myself don't really like the "legal requirement" to depreciate business property. However, the law is the law. Current tax law states that we are required to depreciate the property based on the "lesser" of what was originally paid for it upon initial qcquisition, or it's FMV on the date placed in service; whichever is "LOWER". We don't really have a choice in that.
I myself can't understand why one would want to take as much depreciation as they can. I myself prefer to keep my depreciation deduction as low as I can legally get away with. Why?
Because, when you sell the property you are required to recapture all depreciation taken, in the year of the sale and pay taxes on that recaptured depreciation. Three things about that:
1) Recaptured depreciation is added to and increases your AGI in the year of the sale.
2) The increased AGI has the potential to bump you into the next higher tax bracket.
Now recaptured depreciation is not necessarily taxed the same as your gain on the sale is. It just all depends on the numbers. While you gain on the sale (which is the amount over the original purchase price) is taxed at the capital gains tax rate, recaptured depreciation is taxed at the ordinary income tax rate, with a maximum ceiling of 25%. Good if you're in the 32% bracket or higher. Of no help if you're in the 24% bracket or lower.
Now on top of all that deprecation stuff, if one does not take depreciation with the belief they won't have to recapture it, thus keeping their AGI out of the next higher tax bracket, not so fast. If you don't depreciate the property, then you are still required to recapture the depreciation you "should" have taken and pay taxes on it. So it still increases your AGI and still has the potential to bump one into that next higher tax bracket.
I want to claim the value of the house at time of rental, not the price we paid. Regarding cap gains, is that wrong?
Not just wrong, but not legal either. While you may get away with it while the property is a rental, years down the road when the property is sold or otherwise disposed of, the chances of it raising flags at the IRS may be on the high side for all we know. In a worst case scenario, the property owner dies, the estate sells it, and the numbers used in the sale raises flags at the IRS resulting in an IRS "claw back" to the estate from the beneficiaries of the estate to do things right. The costs incurred can be astronomical, leaving nothing for the beneficiaries when it's all said and done.
