This is my 1st year of renting my home out. I lived in it from Jan 2014 to June 2014 and my tenant moved in on 1 July 2014. I understand I can claim property depreciation (not the land) and that this would be straight line depreciation and I could claim 5.5 months (5 months and 1/2 a month for July); however, my question is, am I required to? I read that if I claim depreciation for say the next 3 years and then sell the house, the IRS can "tax" that and or recoup those costs when I sell. I just don't want to have lower taxes now and "lose" money when I sell in a few years. Any advice?
Thanks!
Yes, you must claim depreciation.
Technically, you are not required to claim it. But you are required to "recapture" depreciation allowed or allowable when you sell the property, in the future. That is, you will pay tax on the depreciation, when you sell, whether or not you actually claim it while you were renting it out.
Another thing you should be aware of: The capital gain (profit) on the sale of your principal residence is tax free (up to $250,000 [$500,000 married]) if you lived in it at least 2 of the 5 years prior to the sale. That essentially means you must sell the house by July 1, 2017, if you want to take advantage of this rule. You will still have to pay tax (at ordinary tax rates, not capital gains rate) on the depreciation recapture, but not the rest of the gain
You guys are awesome! Am I reading the rules accurately....My residential house (without land) is valued at $256,000. So using straight line depreciation it should look like this for this tax year...I would take $256,000 divided by 27.5 which is $9,309 per year of depreciation. Then pro-rate that since my tenant moved in in July to 5.5 months of depreciation (5.5/12 times $9,309) which equals $4,266 on line 18 of my schedule E.
Yes. TurboTax will do the math. You just enter the starting date for the rental and the depreciable amount
My understanding is the living in the property for 2 out of 5 years rule is no longer valid to avoid paying the capital gains. Per Tax Advisor's advice two years ago he said that rule expired.
Then why is that rule still on IRS site? At least was 3 months ago
That rule is still valid for the capital gain exclusion. But, it does not get you out of the depreciation recapture portion
Hal_Al, your advice is very helpful! I am in the same situation, placed a house up for rent in 2014. I plan to rent for less than 3 years and sell the house, taking advantage of the capital gains exclusion. Is there some advantage to me claiming depreciation now, vs. paying the tax on depreciation recapture when I sell it in 3 years?
You do both. It's not really an either-or thing. You claim depreciation now to reduce your taxable income (or increase your deductible loss). You will pay recapture whether you claimed the depreciation deduction or not. So, you should not forgo the present tax benefit.
Hal-Al, you are a great American! Thank you for taking the time to answer these questions. I will absolutely depreciate the rental property!
As I recall prior to TRA '86 depreciation recapture specifically referred to the difference between Straight Line Depreciation and ACRS (DDB 19yrs) and that portion of any gain on dispostion was booked as ordinary. And if the gain exceeded the difference then the excess could be taxed as Cap Gains depending upon the type of asset.
what happens if I officially have my place ready to rent in June and nobody moves in until Oct all same year? Should I indicate that I started using it for business in June or Oct?
tx
I am in the same situation. I am trying to understand what depreciation is and how this will affect me when I sell the house in the future. The information above clear some of my questions and if I understand right, I can take advance now and deduct the depreciation of my house while this one is rented or not do anything (not take advantage of this) . No matter what I chose I will have to deal with depreciation when I sell the house, right?
The part I don't fully understand is how exactly is going to affect me when I sell the house. For example, if I rent my house for 3 years, then move back and live it (make it my primary house) for 2 years before I decide I want to sell it, what the impact will be when I sell it?Am i going to pay taxes for the depreciation?
@Tony21 wrote:I am in the same situation. I am trying to understand what depreciation is and how this will affect me when I sell the house in the future. The information above clear some of my questions and if I understand right, I can take advance now and deduct the depreciation of my house while this one is rented or not do anything (not take advantage of this) . No matter what I chose I will have to deal with depreciation when I sell the house, right?
The part I don't fully understand is how exactly is going to affect me when I sell the house. For example, if I rent my house for 3 years, then move back and live it (make it my primary house) for 2 years before I decide I want to sell it, what the impact will be when I sell it?Am i going to pay taxes for the depreciation?
You pretty much need to take depreciation.
Yes, when you sell the home you will pay tax on the gain due to depreciation
Be aware that just because you move back into the home for 2 years does NOT mean you can exclude the entire gain. In addition to the tax on the depreciation, you will only be able to exclude PART of the profit that you make. That is because you used it as your Principal Residence AFTER it was rented. That trigger the rules that you can only exclude PART of your profit.
Thanks for answer my question.
Is there an article that I can read about this? I feel that because I rent my house now the profit I can get in the future when I sell the house is going to be small.
You are required by federal law to take depreciation. Period.
If you do not depreciate the property, then in the tax year you sell you are still required to recapture the depreciation you "should" have taken, and you will pay taxes on it.
Understand that even if you qualify for the "lived in 2 of last 5" capital gains tax exclusion rule, you will still pay tax on recaptured deprecation *no* *matter* *what*. Recaptured depreciation is not included in the exclusion.
Note that if you did not take the depreciation as required by federal law, then what you "recapture" in the year you sell it gets added to your overall AGI and can potentially put you in a higher tax bracket. That's your "penalty" for not having taken depreciation when you should have.
So this is the first year my wife and I have made over $150k and TurboTax is telling me I can’t claim my deduction from rental property loss. So now it looks as if I both take a loss on the house (on paper due to depreciation) and will have to pay higher taxes later when house is sold. Is there any way to reduce the amount of depreciation “reclaimed” when I sell the house? When all is calculated, I’m making about $4k on the house and the depreciation is $9k, for a loss of $5k, but since I can’t claim that loss, it’s not helping anything.
@CescoP73 wrote:but since I can’t claim that loss, it’s not helping anything.
You can't claim the loss NOW, but that loss is carried over to future tax returns until it CAN be used. Some or all of it may be able to be used if (a) your have passive income (such a profit from the rental), (b) your income falls under $150,000, or (c) you sell the home.
So you will eventually be able to use those losses.
No, unless you sell at a loss or at a minimal gain, you can't really do anything to avoid the tax on the depreciation when you sell the home.
Yes, there is a way to reduce the tax effect of the amount of depreciation “reclaimed” when you sell the house.
The losses that are disallowed on the rental are carried over from year to year.
You get to use them against any net income from the rental in any year you show a profit.
When you sell the property the total amount of disallowed losses can be used to offset your gain. So you will get a tax benefit in the year of sale for the expenses, including depreciation, that were disallowed and carried over.
@CescoP73
[Edited 02/10/2020|11:13PST]
@RobertG wrote:Yes, there is a way to reduce the amount of depreciation “reclaimed” when you sell the house.
When you sell the property the total amount of disallowed losses can be used to reduce your gain. So you don't end up reporting depreciation you were not allowed to use.
@CescoP73
No, the full amount of depreciation is taxed no matter what (assuming there is at least that much of a gain).
When sold, the carryover losses do NOT reduce the gain. They are able to be fully used as an "ordinary" loss, but they do not affect the calculation of the gain nor do they affect depreciation in any way.
What if you are only renting a room or a portion of your personal residence? Will you still have to recapture the depreciation when you sell the home even if you did not deduct the depreciation on rental income?
How do I claim the loss in a later year? Just wait until I make less than $150k? How many years can I roll that over?
Yes, the IRS says that the depreciation 'allowed or allowable' would be recaptured.
Remember, if you rent out only 10% of the square footage of the home, the depreciation and recapture only applies to that 10% of the home that was rented out. In this example, the IRS considers the remaining 90% your personal residence.