I don't understand why an investor is forced to depreciate a rental property. In many cases (say for an investor with one rental unit only) the depreciation amount is less than the standard deduction so for someone with not much else to deduct it really does not bring any value. It is actually worst than taking the standard deduction as the investor ends up somehow paying back the tax return at some point.. What is the logic behind it?
For example, consider a rental property that was purchased for $350,000 and has an annual depreciation of $20,000. After 11 years, the owner decides to sell the property for $430,000. The adjusted cost basis then is $350,000 - ($20,000 x 11) = $130,000. The realized gain on the sale will be $430,000 - $130,000 = $300,000. Capital gain on the property can be calculated as $300,000 - ($20,000 x 11) = $80,000, and the depreciation recapture gain is $20,000 x 11 = $220,000.
Let’s assume a 15% capital gains tax and that the owner falls in the 28% income tax bracket for 2017. The total amount of tax that the taxpayer will owe on the sale of this rental property is (0.15 x $80,000) + (0.28 x $220,000) = $12,000 + $61,600 = $73,600. The depreciation recapture amount is, thus, $61,600.