Rental property depreciation, is it optional?

[ma777]

Hello

Need some help here. I know we can use depreciation on rental property to reduce the rental income tax.

I am wondering if I can skip the depreciation for some year.

For example, for a year, the rental property for many months, so the rental income is less than the holding cost (property tax + mortgage interest + HOA ...) The cash flow is negative already. I don't want to count any depreciation for this year, as it doesn't give any benefit and avoid recapture tax in the future sale.

Is it reasonable?

[DoninGA]

Depreciating an Asset is not optional.  It must be depreciated each tax year until the Asset has been fully depreciated.

[ma777]

Thanks DoninGA.

Let me use an example, the property was purchased at $500K on 2020/1/1.

In 2020, the rental income is $10K, the holding cost is $12K, depreciation is $6K. No tax on rental.

In 2021, the rental income is $10K, the holding cost is $10K, depreciation is $4K. No tax on rental.

When selling it at $500K on 2022/1/1, does it count the sale gain as $500K - ($500K - $6K - $4K) = $10K?

The owner needs to pay sale income tax on $10K. Is it right?

[DoninGA]

@Yes, the 10k would be taxed as ordinary income on the tax return for the year of the sale.

[ma777]

In this case, can owner decide not to depreciate the rental property at all?

It will be much nicer. So there would be no taxable rental income for 2020 and 2021; plus at sale $500K - $500K = $0.

[DoninGA]

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@ma777 wrote:

In this case, can owner decide not to depreciate the rental property at all?

It will be much nicer. So there would be no taxable rental income for 2020 and 2021; plus at sale $500K - $500K = $0.

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Only if you want to receive a letter from the IRS in a year or two demanding payment of the deprecation recapture plus penalties and interest from the time the property was sold.

[ma777]

To confirm it's not optional for depreciation. See post from another website.

https://learn.roofstock.com/blog/rental-property-depreciation-recapture#:~:text=Depreciation%20recap....