How to lower my rental property depreciation cost basis

[wleuter]

I saw some people recommend minimizing the rental property depreciation cost basis because of future tax recapture.

My question is that are there good strategies for doing that?

Like if I did some major home improvements but I don't report them all?

[tagteam · Accepted solution]

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@wleuter wrote:

My question is that are there good strategies for doing that?

Like if I did some major home improvements but I don't report them all?

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There really is no good strategy for minimizing your depreciation deduction. Your cost basis for depreciation is, simply, your cost basis (as is the fair market value when the asset is placed in service); you cannot change those figures.

You can choose not to report the cost of improvements, but then you will not be able to add them to your basis for the purposes of increasing your basis, at least not without a cost recovery method. 

For example, if you spend $10,000 remodeling a bathroom in your rental property, you can choose not to report that improvement. In that case, you will also not be able to add that cost to your basis when you sell the property; if you do, there will be depreciation recapture (Section 1250 gain) to the extent of accumulated depreciation deductions you could have taken.

[wleuter]

@tagteam 

Thanks for your answer!

For the $10,000 you mentioned in your example, is there tax difference between reporting the improvement cost and not?

I am thinking if reporting it, then it will be taxed 25% for depreciation recapture (but I have more annual tax benefit), if not, I may have more long term capital gain when selling the house, but the corresponding tax should be lower.

Is my understanding correct or not?

[tagteam]

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@wleuter wrote:

For the $10,000 you mentioned in your example, is there tax difference between reporting the improvement cost and not?

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It is 0-25% (i.e., the tax rate is capped at 25%); the actual rate is dependent upon your income.

[tagteam]

Again, if you were to pretend the cost of the improvement had never occurred, there would be no recapture and your adjusted basis would be lower (potentially higher capital gain when you sell).