why doesnt rental depreciation increase with housing prices

[bigbunny101]

maybe a funny question, but with the recent jumps in real estate it seems a lot of depreciation is missed because its based on the original purchase price/costs. i am just asking this question to make sure i am not missing anything on the concept itself.

[Anonymous_ · Accepted solution]

The whole concept is to recover what you actually paid for the property over a period of time (or what the property was worth at the time it was converted to business (rental) use).

That figure does not change as a result of unrealized appreciation at a future date and note that it also does not change if the market value of the property decreases. 

[HelenC12]

Tagteam is correct. 

Your depreciable cost basis is based on what you paid for the property and depreciation is allowed on that portion, excluding land. You can't take depreciation on something you didn't pay for.

Another way to look at this is, when you sell, you won't have to recapture the "extra" depreciation you took, if you were able to constantly increase your depreciable basis and related depreciation. What would happen if you sold your property during a down market and had to recoup deprecation greater than the depreciable basis of your property? You may not have enough money from the sale to cover your income taxes.

Depreciation expense is an item that landlords may not know about and the fact that when you sell your rental, you have to claim all the previous years’ depreciation expense. This is called Depreciation Recapture and it's taxed in the year of sale.  You may have to pay 25% on your depreciation recapture. See IRS Publication 544 Chapter 3 Depreciation Recapture, page 27.

[Carl]

I see a fair number of folks who mistakenly believe that depreciation is a permanent deduction. It is not. Whenever you sell the property, you are required to recapture all depreciation taken and pay taxes on it in the year of the sale. Two things to keep in mind about that.

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

2) There is a potential that the increased AGI from depreciation recapture can bump you into the next higher tax bracket.

I myself prefer to keep my depreciation deduction as low as a legally can, specifically for the two reasons listed above.