I know this will all sound "negative". But it is things one needs to take into consideration, along with the good and potential good.
By break even I was referring to cashflow, not profit/loss for tax purposes.
Glad you clarified. Keep in mind that with a mortgage, the principle part of each payment is not deductible. Only the interest. Generally, taxation of that principle is offset by the depreciation you're required to take. What some don't realize though, is that depreciation is not a permanent deduction. When the property is sold, depreciation is recaptured and taxed in the tax year of the sale. One things I think it's important to know about the depreciation recapture though.
While recaptured depreciation itself will be taxed anywhere from 0% up to a maximum of 25%, recaptured depreciation is also added to your AGI. So one must look at the potential that the increased AGI caused by the recapture may bump you into the next higher tax bracket. Not a big deal really, if it only bumps you from the 10% to the 12 % bracket. But depending on the amount of the increase, the jump from the 12% to the 22% bracket could leave you somewhat surprised.
The partners are in the process of filing and amending tax returns, and everything will be caught up depreciation wise as of 12/31/2021.
Hopefully, they're doing it correctly. When you haven't taken depreciation for 2 or more consecutive years, one can't just amend to catch up. It's considered a change in accounting method and one has to file a form 3115 with the most current tax return in order to change from what is an impermissible accounting method (not depreciating) to the permissible and correct method. So if you're not doing so already, you should confer with a tax professional of your choosing, on their most current tax return (which will be the 2021 form 1065 partnership return) to ensure things are fixed here, and are in your best interest.
I guess what I'd like to know is if the depreciation would have any effect on the value of the partnership interest of one of the partners.
One key thing here is not just asking questions, but knowing what questions to ask. I have questions that I can't answer. But a tax professional can.
- When I buy in to a partnership by buying out an existing partner, do I also buy their share of the existing depreciation taken? The answer to that question matters, because when the partnership sells the property I would "think" (I don't know for a fact) that my share of recaptured depreciation will increase my AGI.
- Does the cost basis change when I buy in to the partnership, meaning that "my" share of required depreciation starts on my buy-in date?
Those are two questions I have, but can't answer myself.
I would be buying the interest of one of the 2 partners if I was to go forward with this. Thanks!
