I read about the 27.5 year depreciation aspect and plan to utilize it.
Understand that depreciation is not a choice. You are required by law to depreciate real estate that is used for the production of income.
The last few years I have not had enough income to warrant filing a return.
Again, I get the impression you believe you have a choice here. You don't. When it comes to rental property, any income received from any source for any reason concerning rental property, is rental income and is reported as such.
It is not common for long term residential rental real estate to show a taxable profit "on paper" at tax filing time. It's more common to show a loss for each and every year with long term residential rental property. But that's "on paper". You may (or may not) still have an actual cash flow.
Typically, when you add up the deductible rental expenses of mortgage interest, property taxes, property insurance and throw in the depreciation you're required to take, those four items alone will usually exceed your total rental income for the year. Add to that the other allowable rental expenses (repairs, maintenance, etc.) and you're practically guaranteed to show a loss "on paper" at tax filing time. That does not negate your requirement to report it on your tax return through.
A few more clarifications:
- The depreciation you are required to take by law is not a permanent deduction. When you sell the property in the future, all depreciation is recaptured in the tax year you sell it, and you pay taxes on that recaptured depreciation. If you don't depreciate the property, then you are still required to recapture and pay taxes on the depreciation you "should" have taken. So you can't win on that front. Two things about depreciation recapture;
a) Recaptured depreciation is added to your AGI for the tax year.
b) Recaptured depreciation has the potential to bump your AGI into the next higher tax bracket. Weather it actually does or not, depends on the numbers.
- Your entire mortgage payment on the property is not a deductible expense. Only the interest you pay on that mortgage is deductible. But generally, the rest of the mortgage payment is "offset" by the depreciation you're required to take. So that doesn't come back to bite you (potentially) until the tax year you sell the property and recapture that depreciation.
- I'm kinda wondering about your statement, "The last few years I have not had enough income to warrant filing a return." and it makes me wonder if you've been renting this property "the last few years" and not reporting the income. If so, that's a problem for you that needs to be fixed; especially if your state taxes personal income. If I recall correctly (and I may not) renters are given a credit in CA on their state return based on the amount of rent they pay. So if you have renters claiming the credit they are entitled to, and you're not reporting the income on your tax return, you can expect that to raise eyebrows with the state at some point in time, if it hasn't already.
