Claiming depreciation on a Real estate rental

Question

Say Joe began renting out a rental property in 2015 and he has been claiming a reasonable depreciation annually for the tax years till now.

For 2018 taxes, Joe wishes to stop claiming a depreciation. With the recent changes to the tax law, is the advice on this page still valid?

The IRS included depreciation recapture in the tax law so you are liable whether you used it or not. Claiming depreciation is not optional; any unclaimed depreciation is still subject to recapture when the property is sold.

If you don't take depreciation, the IRS will reduce your basis anyway as if you had taken depreciation. So even if you don't take depreciation the IRS treats it as if you did.

So why not get the yearly benefit of taking depreciation?

Whether Joe stops claiming a depreciation or not, will he end up paying taxes (25% according to the article) on the recaptured depreciation?

Answer 1

Whether Joe stops claiming a depreciation or not, will he end up paying taxes (25% according to the article) on the recaptured depreciation?

Yes, whether or not you report depreciation on your Schedule E, you will face depreciation recapture upon sale of property. The recapture portion is taxed as ordinary income, so rate will depend on your income in the year you sell. If you sell and buy another rental (1031-exchange) you can defer the capital gains tax and depreciation recapture until you sell or die.

The only reason to skip depreciation would be to show greater rental income, but doing so at the cost of double taxation on the depreciated portion doesn't make sense.

Answer 2

No, the new tax code, implemented in 2018, does not change the rules regarding depreciation of real estate assets. To be clear, there are some small purchases that may now be deductible 100% in the first year, i.e. expensed. But the annual deduction requirement did not go away.