Am I required to claim rental property depreciation on my Schedule E (line 18)?

[justineandmatt_p]

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!

[Hal_Al]

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.

[Hal_Al]

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

[justineandmatt_p]

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.

[Hal_Al]

Yes. TurboTax will do the math. You just enter the starting date for the rental and the depreciable amount

[cfkindt]

My understanding is the living in the property for 2 out of 5 years rule is no longer valid to avoid paying the capital gains.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.

[zenmster]

Then why is that rule still on IRS site? At least was 3 months ago

[Hal_Al]

That rule is still valid for the capital gain exclusion. But, it does not get you out of the depreciation recapture portion

[redamen]

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?

[Hal_Al]

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.

[redamen]

Hal-Al, you are a great American!  Thank you for taking the time to answer these questions.  I will absolutely depreciate the rental property!

[TPKR]

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.

[zenmster]

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

[Hal_Al]

June. You "placed it in service" when it was ready to rent

[Tony21]

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?