Rental Property Depreciation for Current/Previous Year
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Subject Author Date
Rental Property Depreciation for Current/Previous Year olivia 02-21-2007
Posted by olivia on February 21, 2007, 4:58 am
I am a first time landlord and rented our previous home in
September-2005. When I filed my taxes last year, I did not depreciate.
My perception (or rather misunderstanding) was that if I claim
depreciation, that will be decreased from the cost basis of the
property and hence "reduce the buying price" and hence increase my
effective profit when I sell the property in future years, hence
increase my tax liability when I decide to sell the property. As it
turns out, I was wrong. Based on the information that I have read on
the internet, it seems that the depreciation will anyway be deducted
and taxed when I sell the property whether or not I have claimed it in
the past years or not. Please correct me if I am wrong here.
I have read some IRS publications regarding depreciation but have not
been able to get the answers that I need. I have the following
questions and would appreciate if you can either point me to a
resource, previous posts or please answer this question for me.
1. Is depreciation taxed when I sell the property even if I do not
claim it in previous years is correct or wrong?
2. Can I claim the depreciation for previous year (since I did not
claim it then)? In my case, the home was rented for only 4 months in
2005. If so, what form shoudl I be using to do that?
3. From previous question, if I am not able to claim the depreciation
for the previous year (2005), will it automatically be deducted from
cost basis when I sell the home in the future?
3. Is it actually better in some scenarios to not claim depreciation
and let it lower the cost basis in the year of sale to claim a lower
tax rate/liability then (if it indeed is lower, I am not sure)? I seem
to have read

I would appreciate any responses in this regard

Olivia


Posted by Rich Carreiro on February 21, 2007, 7:30 am

> 1. Is depreciation taxed when I sell the property even if I do not
> claim it in previous years is correct or wrong?

That is correct. Basis is reduced by allowable depreciation,
whether or not is was claimed.

> 2. Can I claim the depreciation for previous year (since I did not
> claim it then)?

Sure. Just amend last year's return.

> 3. From previous question, if I am not able to claim the depreciation
> for the previous year (2005), will it automatically be deducted from
> cost basis when I sell the home in the future?

Moot, since you can amend the 2005 return to claim it.

> 3. Is it actually better in some scenarios to not claim depreciation
> and let it lower the cost basis in the year of sale to claim a lower
> tax rate/liability then (if it indeed is lower, I am not sure)? I seem
> to have read

I can't see how. The result on sale of will be the same
either way (since basis is reduced by depreciation even
if it is not claimed), and not claiming depreciation will
give you higher taxes in the interim.

--
Rich Carreiro rlcarr@animato.arlington.ma.us


Posted by Bucky on February 22, 2007, 3:20 am
wrote:
> > 1. Is depreciation taxed when I sell the property even if I do not
> > claim it in previous years is correct or wrong?
>
> That is correct. Basis is reduced by allowable depreciation,
> whether or not is was claimed.

wow, didn't know that. good to know.


Posted by joetaxpayer on February 21, 2007, 9:30 am


olivia wrote:

> I am a first time landlord and rented our previous home in
> September-2005. When I filed my taxes last year, I did not depreciate.
> My perception (or rather misunderstanding) was that if I claim
> depreciation, that will be decreased from the cost basis of the
> property and hence "reduce the buying price" and hence increase my
> effective profit when I sell the property in future years, hence
> increase my tax liability when I decide to sell the property.
>
> Olivia

True, but depreciation is not *optional*. When you place a unit in
service as a rental, you must take depreciation.
At worse, it should be a wash, look at the tax savings on the
depreciation taken, and put that money aside. When you sell, recaptured
depreciation is taxed at a favorable rate, so you should have more money
squirreled away than tax liability on the sale.

JOE
JoeTaxpayer.com


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