“If you can qualify as a real estate professional, then 100% of your real estate losses can be used to offset your other income. Otherwise this real estate paper loss is limited to $25,000 if your income is less than $100,000, and begins to phase out as your income increases. At $150,000, the $25,000 real estate paper loss is totally disallowed… One way around the paper loss limitation is if you or your spouse (if filing jointly) can qualify as a real estate professional. ”
The book also states a test as to how you can fulfill IRS requirements that you qualify as a real estate professional.
page 54
“When you sell your property, you will be required to recapture the depreciation at ordinary income tax rates. You then pay the capital gains rate on the difference between the basis and the sales price (less costs). Or you can delay the tax through a like-kind exchange.”
So yes you have to recapture the depreciation when you sell it, but if you keep doing 1031 exchanges, you can essentially avoid paying it (which was my plan). Also, if you do have to pay taxes on your depreciation, you can at least arrange your depreciation to be paid at your ordinary income rate, which in the future should be lower if you have planned it out right.
