Question About Depreciation And Capital Gains In My Rentals
Hi guys,
I am wondering if someone can clear up a question about depreciation in my rental homes.
I have a couple single family rental homes. I have been told in the past to not write off the house depreciation because when it is time to sell, this will decrease the amount of capital gains I have to pay compared to if I had written off the home depreciation over the years. I was told that as I write of depreciation, this brings down the amount that I originally paid.
So for example:
With me NOT writing off depreciation all these years. - I bought for 100,000 and sold for 200,000. I would have to pay capital gains on the gain of $100,000.
If I DID write off depreciation all these years. I bought for 100,000 and sold for 200,000. Also wrote off $50,000 in deprecation over the years. Would I have to pay capital gains on the gain $150,000 (because my deprecation write offs have brought down the purchase amount)
Any info would be appreciated.
With rental property, capital gain comes in two flavors -- capital gain due to appreciation and capital gain due to unrecaptured depreciation. Appreciation is taxed at 15% while unrecaptured depreciation is taxed at 25%.
From your example, it you buy for $100K and sell for $200K and you have a $100K gain due to appreciation. During the holding period, you also had $50K in allowable depreciation so your gain due to depreciation will be $50K.
You were correctly told that depreciation reduces your cost basis, which subsequently makes your capital gain larger when you sell.
You were MISLED when told not to take the depreciation expense throughout your holding period. The IRS does not care whether you took the depreciation or not. The IRS will STILL tax you on the amount of depreciation you were allowed to take from May 1997 to the present when you sell the property.
Dave T wrote an article a few years ago called "How Depreciation Is Recaptured." Even though written before the maximum long term capital gains tax rate was reduced to 15%, the process described is still valid today. Search the article archives.
Consult your CPA for specific details. If you have not taken any depreciation, your CPA can help you figure out how to "catch up" on your next tax return.[ Edited by NewKidInTown3 on Date 07/05/2007 ]
NewKidInTown3
Very good explanation of consequences of "not taking Depreciation"!
Thanks for the help guys
Excellent explanation, NewKid! Many people are unaware that depreciation will be figured by the IRS whether it is actually taken or not.
[addsig]
The lesson here would seem to be to keep your basis as small as possible so you pay the capital gains rate rather than the recapture. However, money now (from depreciation tax deductions) is worth more than money later (from taxes saved at selling). For most of us highly leveraged investors, we would do much better to take the depreciation deduction and use the taxes saved now to pay down our debt than to minimize our basis, and thus our deduction, in order to save on taxes later.
Chris
I think you are ok asking for cash or cashiers check. The only problem when you say he is behind in his rent and hell tells the judge you were insisting on cash and he cannot prove he paid... It sounds reasonable but little fishy. Make sure you give him receipts.
Have him get a money order at the post office or Walmart. It is as good as cash plus it has a paper trail. If worried make a copy before you cash it. If a tenant bounce a check it is money order only from then on plus a bounced check fee (set by state). Good luck...
I disagree; a couple thousand dollars of cash in my pocket is always a good situation IMO...
Chris
I am with you Chris, a couple of thousand in my pocket is a good thing any time of month.
Of course, Dane live in East Des Moines where the crime rate is high and drives a big caddy so he has to worry about being a target.
Here in Chicago we drive beat up old pick up trucks and folks ask if we need a hand out so nobody thinks we could have any cash in our pocket.
And of course East Lansing is home to only upright and honest citizens who would not dream of putting their hands into any pocket except their own so I can sympathize with you missing Mr. Danes point..
as I recall, the law in CA is they have to bounce a check 1st b4 cash or certified.
check the Nolo guide.
I do not accept cash from tenants. Too easy for me to spend! I like the electronic paper trail that a check or money order produces.
All about the terms of the agreement. My agreement says check or money order. It protects both parties interests. Kinda hard to argue with a cancelled check. I think banks have to accept legal currency, not sure if your local supermarket has to take $100 in quarters and pennies (smile)
Have you talked to his case worker. Had a problem like that and I said fine we can bring in your case work reinspect and if not up to par you can move out. Never heard another word. Section 8 can be a real pain. It is the everyone owes me something deal. Not a big fan.
J
Here is the deal. We have had two so far like this. One was bad, and ending up suing us with free legal help and one we still have.
The one that complained when she moved in, is one that we really do not want to get rid of. She is particular about her house, but she definitely takes care of it.
It sounds like your is the first case.
Thanks for that post Joel. I have a Sec 8 tenant that has been driving me, my maintenance guys, and other managers up the wall. If the bathroom faucet drips...rest assured you will get a call at midnight.
But on the backside, because of her complaints, I know the property is in great condition since she keeps the place spotless. So a pain for the maintenance guy is a good tenant sometimes. I thought i was the only one.
Get rid of section 8. The renters create/find problems and call the sec 8 inspector and the landlord is ordered to fix it. It is an endless cycle. This guy sounds like he has done this before and knows how to manipulate it. My belief is many section 8 renters have nothing to do all day other than think of ways to play games. Kick him out as soon as you can.