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Its also my understanding that the basis for your property is reduced by the depreciation allowed, not the depreciation taken. So, doesn matter whether you take it or not.
It is possible for depreciation TAKEN to be greater than depreciation ALLOWED, for example if you accelerated depreciation deductions, and in this case (when TAKEN>ALLOWED), the recapture is applied to depreciation taken.
If you missed any depreciation, and have owned the property for more than three years, you can get it back all in one year without havign to Nike White Shorts Womens
Anyone with a CPA saying anything different should get a new CPA.
By choosing to take depreciation when you in a higher tax bracket you are keeping more money in your pocket. Of course if you could better use $2,000 this year than $3,000 next year it might not be worth your while. It Nike Sb Joggers
important to plan your taxes accordingly.
Whether or not to take depreciation depends in part on what your estimated taxes will be for this year and the future. If you claim depreciation to offset income that you would otherwise be paying in a higher tax bracket, you can save money. If however you use depreciation to offset income that you paying in a lower tax bracket it may be wise to hold off on claiming it until you are in a higher bracket.
So in other words, lets say you took no depreciation, or less than the IRS says you were supposed to. The IRS will recapture based on the depreciation ALLOWED (determined by taking the straightline deduction over 27.5 years).
When unrecaptured depreciation is taxed, the depreciation allowed or allowable, whichever is greater, is what is taxed at the 25% recapture rate.
Should I be taking a depreciation on my rental
Depreciation is not a mandatory expense, but take it each year it is allowable because you will be taxed on it anyway.
is 30%. Now you esentially not having to pay 30% tax on $10,000 = $3,000.
For example, lets say you can claim $10,000 in depreciation this year when you make $50,000 pre tax income. For mathematical sake let say the tax at this level is 20%. What you are essentially doing is not having to pay 20% of $10,000 = $2,000.
You can do this by filing for automatic IRS consent via IRS Form 3115 Application for Change in Accounting Method.
Now in this same situation lets presume you have a lot on your plate that will be sold next tax year thereby increasing your income to $100,000 pre tax. Since you plan ahead you decide to claim this $10,000 depreciation in the $100,000 pre tax income year. Again for mathematical sake let say the tax at this level Nike Sweater Womens
I sure you get other posters with different responses.
Just to clarify the recapture rules.
Oh, BTW, keep taking the deduction. I almost stopped as well because I feared the recapture, but if you use the 1031 exchange and homeowner tax exemption effectively, you can avoid the tax.
Excess depreciation, such as the bonus 50% depreciation we have seen in recent years, is that depreciation taken that exceeds the depreciation that would have been taken on a straightline depreciation method.
Excess depreciation is recaptured at the taxpayer ordinary income tax rate which may be higher than the 25% recapture rate.
Allowed depreciation is the depreciation taken. Allowable depreciation is the depreciation that was allowed but not taken.
It is my understanding, confirmed by recent and in depth conversation with my new CPA, that you will have to pay depreciation recapture tax on the amount of the depreciation when you sell the property. Depreciation reduces the basis, and so increases your gain on the sale.
This is different than in another thread where RECPATAXMAN and I discussed this point, and came to the conclusion that the depreciation recapture applied only the accellerated portion. Since accellerated depreciation doesn apply to properties purchased recently (sincee 1987?), you wouldn have to pay the recapture tax. According to my new CPA, which has extensive real estate experience, that incorrect. Yes, there was a recapture tax for accellerated depreciation. Maybe still is, if you have a property under those rules. The recapture for the straight line depreciation is different and does still apply.
At least that my plan. With a 1031 exchange, you can upgrade that property into larger/nicer/higher income producing property and the capital gains tax gets deferred. However, if you exchange your way into a home you like to live in, move in for 2 years, then sell it and take the $500,000 exemption (if you married) and repeat.
I can go into details here (I not a tax advisor so I encourage you to seek one accordingly). The above information is from Albert Aiello Goldmine of Brilliant Tax Strategies. Worth the investment if you are serious about real estate.
I assume you are referring to the straight line 27.5 year depreciation that currently allowed, and not the accellerated depreciation allowed on some properties acquired long ago.
The recapture tax is applied to depreciation ALLOWED, or depreciation TAKEN, whichever is greater.
I believe the answer is that you have to pay depreciation recapture tax, currently 25%, on the portion of the gain on a sale that is attributable to the depreciation allowed on the property. Your basis is reduced by the depreciation allowed. The gain is the sale price (less all sales costs) minus the basis. The portion equal to the depreciation allowed (or the total gain, if less) is subject to recapture tax. The remainder is subject to capital gains tax.
This issue has been discussed a few times before. I wade in yet again, since I now have a new CPA who seems to actually understand real estate investing.
I actually pretty confident about this answer. My new accountant is quite knowledgable and experienced, and spoke to both this form of recapture tax and the older accellerated depreciation recapture tax.
I not confused, but after reading extensively on this topic, Nike Dri Fit Sweatpants Womens having previous discussions here on bigger pockets, and discussing it will two different accountants, I not 100% confident of the answer.
file amended returns (file amended return if it less than 3 years).
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