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

[AmeliesUncle]

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@Tony21 wrote:

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? 

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You pretty much need to take depreciation.

Yes, when you sell the home you will pay tax on the gain due to depreciation

Be aware that just because you move back into the home for  2 years does NOT mean you can exclude the entire gain.  In addition to the tax on the depreciation, you will only be able to exclude PART of the profit that you make.  That is because you used it as your Principal Residence AFTER it was rented.  That trigger the rules that  you can only exclude PART of your profit.

[Tony21]

Thanks for answer my question.

Is there an article that I can read about this? I feel that because I rent my house now the profit I can get in the future when I sell the house is going to be small.

[Carl]

You are required by federal law to take depreciation. Period.

If you do not depreciate the property, then in the tax year you sell you are still required to recapture the depreciation you "should" have taken, and you will pay taxes on it.

Understand that even if you qualify for the "lived in 2 of last 5" capital gains tax exclusion rule, you will still pay tax on recaptured deprecation *no* *matter* *what*. Recaptured depreciation is not included in the exclusion.

Note that if you did not take the depreciation as required by federal law, then what you "recapture" in the year you sell it gets added to your overall AGI and can potentially put you in a higher tax bracket. That's your "penalty" for not having taken depreciation when you should have.

[CescoP73]

So this is the first year my wife and I have made over $150k and TurboTax is telling me I can’t claim my deduction from rental property loss. So now it looks as if I both take a loss on the house (on paper due to depreciation) and will have to pay higher taxes later when house is sold. Is there any way to reduce the amount of depreciation “reclaimed” when I sell the house? When all is calculated, I’m making about $4k on the house and the depreciation is $9k, for a loss of $5k, but since I can’t claim that loss, it’s not helping anything. 

[AmeliesUncle]

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@CescoP73  wrote:

but since I can’t claim that loss, it’s not helping anything. 

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You can't claim the loss NOW, but that loss is carried over to future tax returns until it CAN be used.  Some or all of it may be able to be used if (a) your have passive income (such a profit from the rental), (b) your income falls under $150,000, or (c) you sell the home.

So you will eventually be able to use those losses.

No, unless you sell at a loss or at a minimal gain, you can't really do anything to avoid the tax on the depreciation when you sell the home.

[RobertG]

Yes, there is a way to reduce the tax effect of the amount of depreciation “reclaimed” when you sell the house.

The losses that are disallowed on the rental are carried over from year to year. 

You get to use them against any net income from the rental in any year you show a profit.

When you sell the property the total amount of disallowed losses can be used to offset your gain.  So you will get a tax benefit in the year of sale for the expenses, including depreciation, that were disallowed and carried over.

@CescoP73

 [Edited 02/10/2020|11:13PST]

[AmeliesUncle]

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@RobertG wrote:

Yes, there is a way to reduce the amount of depreciation “reclaimed” when you sell the house.

When you sell the property the total amount of disallowed losses can be used to reduce your gain.  So you don't end up reporting depreciation you were not allowed to use.

@CescoP73

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No, the full amount of depreciation is taxed no matter what (assuming there is at least that much of a gain).

When sold, the carryover losses do NOT reduce the gain.  They are able to be fully used as an "ordinary" loss, but they do not affect the calculation of the gain nor do they affect depreciation in any way.

[brodel77]

What if you are only renting a room or a portion of your personal residence? Will you still have to recapture the depreciation when you sell the home even if you did not deduct the depreciation on rental income?

[CescoP73]

How do I claim the loss in a later year? Just wait until I make less than $150k? How many years can I roll that over?

[JamesG1]

Yes, the IRS says that the depreciation 'allowed or allowable' would be recaptured. 

Remember, if you rent out only 10% of the square footage of the home, the depreciation and recapture only applies to that 10% of the home that was rented out.  In this example, the IRS considers the remaining 90% your personal residence.

[Drus]

I have a 200K rental property for 3 years now. I had not deducted depreciation; because my accountant did not bring it up. Can I deduct it for 2019? How should I depreciation? Rental Income for the year is $9000, Interest $7000, repairs $3000.

Thank you very much in advance!

[ColeenD3]

You have three choices.

• Pay tax on the recaptured depreciation even though you never took it.
• Amend as far back as you can to take the depreciation deduction for those years and forgo the balance.
• File Form 3115. It is complicated and TurboTax does not offer this form.

Select your tax year for amending instructions:

• 2019
• 2018
• 2017
• 2016

Unfortunately the depreciation recapture is "allowed or allowable" meaning even if you never depreciated it, you would still have to recapture the depreciation. Depreciation taken would be on line 18 of Schedule E.

One solution is to elect an accounting method change and file a Form 3115 in the current year and take the  prior depreciation as a section 481(a) adjustment. [land  value is separated, land is not depreciated]

Below are the IRS links related to the change in accounting method. TurboTax does not have that form.

May be these will help

Form 3115, Application for Change in Accounting Method

Form 3115

[AmeliesUncle]

Amending is not an option.  If depreciation was not taken for at least 2 consecutive years, the only way to correct it is by Form 3115.

I highly recommend going to a good tax professional that is familiar with Form 3115 to file this year's tax return and to correct the mistake of not taking depreciation..

[HYM777]

Hi AmeliesUncle:

You are very helpful.

I am checking if I did depreciation on my rental property in 2014, the first year the property became rental. 

On Form 8829. Part III (Depreciation of your home), line 41 (Depreciation Percentage) showed 2.5641%. Somehow it didn't have land value. Did this info mean I declaimed the depreciation on my first year rent?

Thank you millions in advance.

HYM

[AmeliesUncle]

Form 8829 is for your Home Office, not for a rental property.  So it looks like you were depreciating a Home Office (but forgot to enter the land, which likely means the depreciation is incorrect).  But that has nothing to do with your rental property.

Do you have a Home Office for a business that you report on Schedule C?   If so, that is what that shows.  If not, it looks like that is an error, in which case I recommend going to a tax professional to figure out things.