My state doesn't recognize much special depreciation. What real estate tax strategies can I use to reduce my taxes in my state?

[candycanepanda]

For anyone unfamiliar with the issue or needing a reboot, the feds and 25 or so states recognize special depreciation where you can express depreciate things, unfortuantely I'm in a state that is not business friendly.   I need to keep my income reasonable high for loans so I don't want to expense everything. What tax strategies are at the table here?

In the past I like to depreciate as much as I can in Schedule E instead of expensing things, so that my income stays strong for loans and financing.   

I'm thinking I have a few options but please help! 

-Expensing more in schedule E instead of depreciating

-Moving things over to schedule C... what options does this give me? If I move things to schedule C, am I left with the same financing challenges if I over-expense things instead of depreciate things?  

[candycanepanda]

The other thing I'm thinking is, do state returns have to match federal?

If CT guidelines allows me to expense something instead of depreciate it, can I decide to have a different state return and expense as much as possible just on the state return and not the federal? 

[Mike9241]

since we know little about your financial situation why not consult a pro that can you actual numbers or reasonable estimates.

in addition, you can not move rental expenses to schedule C unless

you provides “substantial services” to short-term renters, the IRS says that the rental activity should be reported on Schedule C, and that the property owner must pay self-employment taxes on the income. If there is a loss, it can be fully deducted without regard for the passive loss limitation rules. Substantial services are defined by the IRS as: regular cleaning, changing linens, or maid services…furnishing of utilities or cleaning of public areas do not count as substantial services. For example, if you rent out a room in your house on Airbnb to short-term renters, the “substantial service” requirement can be satisfied if you are cleaning and changing linens after each short-term renter has left. This rule can apply to an entire property, or to a single room in a house. in this case all rental income and expense go on schedule C. 

[candycanepanda]

Thanks for feedback....

good to know on the short term rental thing, very odd since the IRS literally puts "vacation rentals" on their schedule E, it's almost like they're trying to trick people.

A question in meantime, I've researched that I am in fact able to submit a completely different return for the state I am in, as long as the income numbers match.

I deprecaited a lot in my federal.

I plan to expense everything I can in the state to reduce the taxable income.

Are there any rules or guidelines about this?  My understanding is that I can choose to expense or depreciate.  

[Carl]

I plan to expense everything I can in the state to reduce the taxable income. Are there any rules or guidelines about this? My understanding is that I can choose to expense or depreciate.

Generally, you have to depreciate assets. In a nutshell, a business asset is something with a life expectancy of more than one year, that is used on a recurring basis to produce income. The IRS does have provisions to allow you to just expense an asset. If the asset cost less than $2,500 then you can expense it. But there are exceptions. For example, for some things that cost less than $2,500 on SCH E rental property,  if it becomes "a material part of" the structure, you have to depreciate it regardless of cost. But there's even exceptions for that too.

Many states follow the IRS guidelines on this. But they don't have to for state taxes.

When it comes to depreciation there's one thing to keep in mind. Depreciation is *NOT* a permanent deduction. All depreciation is recaptured and taxed in the tax year you sell or otherwise dispose of the property. Two things to be aware of about recaptured depreciation.

1. Recaptured depreciation is added to and therefore increases your AGI in the tax year of recapture.

2. Recaptured depreciation has the potential to bump you into the next higher tax bracket, depending on the numbers. So if it makes your AGI to high, that could automatically disqualify you for other deductions and credits you would otherwise get.