Depreciation is nice if you are a RE professional, but if you are not and you make over 150K per year, it doesn’t help too much in the first 5-7 years of property ownership.
I have a tax loss on investment property thanks to depreciation (it cash flows otherwise). Fortunately we make too much to take the loss. But neither of us is a full-time RE professional. If one of us changed our profession we would take a large pay cut and get the depreciation, but that would be a losing proposition.
Also, you wrote that “When you sell your property, you will be required to recapture the depreciation at ordinary income tax rates.” The law is now such that depreciation recapture is a special 25% rate. This went into effect in 1997. Your reference is stale and incorrect.
As a consequence, we are sitting on about 20K of carryover losses. If we sold today, we would reduce the capital gains (15%) put have to pay 25% (Recapture of depreciation is 25% not ordinary tax rates). So, the depreciation would result in a net ADDITIONAL TAX of 10% on the amount I have depreciated. Not exactly a benefit.
The good news is that when we pay off the loan we can have multiple years of tax-free income because of the carryover depreciation loss.
The lessons:
1. Verify anything you read or hear regarding tax rules. They change and some folks out there don’t know them.
2. Don’t assume that an investment strategy that is tax advantageous to someone else is advantageous to you.
