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Level 5

Depreciation Expense.

In 2018, I rented my condo starting December 1, as my wife went back to Peru to be the caregiver for her parents.  The rental income basically covers all my fixed expenses and I make before taxes about $150 a month. My only other income is from pensions. The new tax laws increase the standard deduction for married couples to $25,000. This is about  $10,000 more than if I itemized my expenses. I'm also allowed I believe to use my mortgage interest and real estate taxes against this income since the standard deduction is a credit and I'm not double counting.  Do I have to declare the depreciation expense since I owe $0 in taxes and it provides no benefit but could be a liability when I sell the condo?

4 Replies
Level 20

Depreciation Expense.


@Alexyeva11 wrote:

Do I have to declare the depreciation expense since I owe $0 in taxes and it provides no benefit but could be a liability when I sell the condo?


You are not actually required to claim a deduction for depreciation, but you will be required to recapture the depreciation allowed (or in this case, "allowable") when you dispose of the property.

Level 5

Depreciation Expense.

Yes, This reply and others on different subjects related to rental income/ expenses were helpful to my understanding of the tax laws. 

Level 20

Depreciation Expense.

You really really should depreciate the property even if you don't see a benefit this year as you could have an NOL that you can carry forward.  

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Level 20

Depreciation Expense.

You are reqruired by law to depreciate rental property. The only exception would be if you rented fhe property for less than 12 months in a single calendar year.

So if you rented the property from Sept 2018 to Apr of 2019, that does not exempt you from taking depreciation since your period of rental covers two tax years.

. It is *EXTREMELY* rare for rental property to show a taxable gain "on paper" when you file your taxes. When  you combine the deductible rental expenses of depreciation, mortgage interest and property taxes that alone is usually enough to exceed your rental income. Add to those three major deductions any other allowed rental expenses, and that's what makes it "RARE" for rental property to actually show a taxable profit.

Once your rental deductions gets your taxable rental income to zero, the excess deductions are just "carried forward" to the next year. So when dealing with rental property over a number of years, your carry forward losses will just increase with each passing year.

Do I have to declare the depreciation expense since I owe $0 in taxes and it provides no benefit

Bottom line answer is yes.

but could be a liability when I sell the condo?

That';s the way it works with current tax law. In the year you sell the rental two things will happen (weather you like it or not.)

1) All prior depreciation taken is recaptured and taxed in the year you sell it. If you do not take depreciation, then your cost basis in the property *WILL* be reduced by the amount of depreciation that you "should" have taken - thus increasing any gain on the sale. So either way you go, you lose.

2) All carry forward expenses are deducted first from your taxable gain on the sale. Then if there are any deductible expenses left they are deducted from the other ordinary income (such as W-2 income) thus reducing your tax liability.

So it's perfectly possible for your carry forward deductions to offset a vast majority (if not all) of the recaptured depreciation that you "WILL" be taxed on one way or the other.

Depending on your AGI in the year you sell the property, your tax on the recaptured depreciation will be anywhere from 0% to a maximum of 25%. Since any gain on the sale of the property is included in your AGI for the year of the sale, it's impossible to say or even guess what your tax on your recaptured depreciation would be.