topic Am I required to claim rental property depreciation on my Schedule E (line 18)? in Investors & landlords

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

justineandmatt_p — Wed, 26 Jun 2019 22:55:39 GMT

This is my 1st year of renting my home out. I lived in it from Jan 2014 to June 2014 and my tenant moved in on 1 July 2014. I understand I can claim property depreciation (not the land) and that this would be straight line depreciation and I could claim 5.5 months (5 months and 1/2 a month for July); however, my question is, am I required to? I read that if I claim depreciation for say the next 3 years and then sell the house, the IRS can "tax" that and or recoup those costs when I sell. I just don't want to have lower taxes now and "lose" money when I sell in a few years. Any advice?

Thanks!

Yes, you must claim depreciation. Technically, you are no...

Hal_Al — Thu, 06 Jun 2019 05:10:36 GMT

Yes, you must claim depreciation.

Technically, you are not required to claim it. But you are required to "recapture" depreciation allowed or allowable when you sell the property, in the future. That is, you will pay tax on the depreciation, when you sell, whether or not you actually claim it while you were renting it out.

Another thing you should be aware of: The capital gain (p...

Hal_Al — Thu, 06 Jun 2019 05:10:38 GMT

Another thing you should be aware of: The capital gain (profit) on the sale of your principal residence is tax free (up to $250,000 [$500,000 married]) if you lived in it at least 2 of the 5 years prior to the sale. That essentially means you must sell the house by July 1, 2017, if you want to take advantage of this rule. You will still have to pay tax (at ordinary tax rates, not capital gains rate) on the depreciation recapture, but not the rest of the gain

You guys are awesome! Am I reading the rules accurately.....

justineandmatt_p — Thu, 06 Jun 2019 05:10:39 GMT

You guys are awesome! Am I reading the rules accurately....My residential house (without land) is valued at $256,000. So using straight line depreciation it should look like this for this tax year...I would take $256,000 divided by 27.5 which is $9,309 per year of depreciation. Then pro-rate that since my tenant moved in in July to 5.5 months of depreciation (5.5/12 times $9,309) which equals $4,266 on line 18 of my schedule E.

Yes. TurboTax will do the math. You just enter the starti...

Hal_Al — Thu, 06 Jun 2019 05:10:41 GMT

Yes. TurboTax will do the math. You just enter the starting date for the rental and the depreciable amount

My understanding is the living in the property for 2 out...

cfkindt — Thu, 06 Jun 2019 05:10:42 GMT

My understanding is the living in the property for 2 out of 5 years rule is no longer valid to avoid paying the capital gains. Per Tax Advisor's advice two years ago he said that rule expired.

Then why is that rule still on IRS site? At least was 3 m...

zenmster — Thu, 06 Jun 2019 05:10:44 GMT

Then why is that rule still on IRS site? At least was 3 months ago

That rule is still valid for the capital gain exclusion....

Hal_Al — Thu, 06 Jun 2019 05:10:45 GMT

That rule is still valid for the capital gain exclusion. But, it does not get you out of the depreciation recapture portion

Hal_Al, your advice is very helpful! I am in the same sit...

redamen — Thu, 06 Jun 2019 05:10:47 GMT

Hal_Al, your advice is very helpful! I am in the same situation, placed a house up for rent in 2014. I plan to rent for less than 3 years and sell the house, taking advantage of the capital gains exclusion. Is there some advantage to me claiming depreciation now, vs. paying the tax on depreciation recapture when I sell it in 3 years?

You do both. It's not really an either-or thing. You cla...

Hal_Al — Thu, 06 Jun 2019 05:10:49 GMT

You do both. It's not really an either-or thing. You claim depreciation now to reduce your taxable income (or increase your deductible loss). You will pay recapture whether you claimed the depreciation deduction or not. So, you should not forgo the present tax benefit.

Hal-Al, you are a great American! Thank you for taking t...

redamen — Thu, 06 Jun 2019 05:10:51 GMT

Hal-Al, you are a great American! Thank you for taking the time to answer these questions. I will absolutely depreciate the rental property!

As I recall prior to TRA '86 depreciation recapture speci...

TPKR — Thu, 06 Jun 2019 05:10:52 GMT

As I recall prior to TRA '86 depreciation recapture specifically referred to the difference between Straight Line Depreciation and ACRS (DDB 19yrs) and that portion of any gain on dispostion was booked as ordinary. And if the gain exceeded the difference then the excess could be taxed as Cap Gains depending upon the type of asset.

what happens if I officially have my place ready to rent...

zenmster — Thu, 06 Jun 2019 05:10:55 GMT

what happens if I officially have my place ready to rent in June and nobody moves in until Oct all same year? Should I indicate that I started using it for business in June or Oct?

June. You "placed it in service" when it was ready to rent

Hal_Al — Thu, 06 Jun 2019 05:10:57 GMT

June. You "placed it in service" when it was ready to rent

Re: June. You "placed it in service" when it was ready to rent

Tony21 — Sat, 08 Feb 2020 20:58:32 GMT

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?

Re: June. You "placed it in service" when it was ready to rent

AmeliesUncle — Sun, 09 Feb 2020 00:53:17 GMT

@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?

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.

Re: June. You "placed it in service" when it was ready to rent

Tony21 — Sun, 09 Feb 2020 07:35:21 GMT

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.

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

Carl — Sun, 09 Feb 2020 15:46:11 GMT

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.

Re: Yes, you must claim depreciation. Technically, you are no...

CescoP73 — Mon, 10 Feb 2020 17:12:38 GMT

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.

Re: Yes, you must claim depreciation. Technically, you are no...

AmeliesUncle — Mon, 10 Feb 2020 18:26:34 GMT

@CescoP73 wrote:
but since I can’t claim that loss, it’s not helping anything.

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.