Is renting a place out worth it considering the Depreciation Recapture Tax?

[Anonymous]

Hmm. I flipped through a book a while ago called The Accidental Landlord that was addressed to people deciding whether to rent out their current house--something like that would probably be worth reading. It covered tax issues, but of course I don't remember what it said.

[Anonymous]

What if you never claim depreciation -- just pay taxes each year on the income from the rent? Then when you sell the property, you pay capital gains tax on the sale amount minus what you paid for it?

If you're bringing in more rent each year than you are spending on mortgage/insurance/taxes/maintenance, and if the land appreciates in value, you still come out ahead, right?

[Anonymous]

OP you are getting a lot of not helpful/accurate info. on this thread (for example, depreciation does lower basis--and it does so whether you claim it on your taxes or not).

I think the short answer is that the depreciation recapture should not cause you any problems (because, as the name suggests, it is just "recapturing" tax breaks you got the benefit of while renting the house), but you should check with a tax accountant because the rules for how you treat tax deductions for rental property are complicated and vary according to income level.

[Anonymous]

Move back in the last 2 years and you can avoid the tax upon selling.

We have a long-term rental in NW. We plan to hang onto if for life. It's almost paid off and it rents way more than the mortgage.

If we were to ever decide to sell---once the kids are gone we'd move back before selling it.

[Anonymous]

Anonymous wrote:Move back in the last 2 years and you can avoid the tax upon selling.

We have a long-term rental in NW. We plan to hang onto if for life. It's almost paid off and it rents way more than the mortgage.

If we were to ever decide to sell---once the kids are gone we'd move back before selling it.

have to live it 2 years out of the last 5 prior to selling to avoid the tax.

[Anonymous]

Assuming you either have an AGI of over $150K OR you do not manage the rental property yourself, you cannot deduct rental losses from ordinary income, so what you need to do is
- compare the income you bring every year after all the expenses and taxes from the rental with your capital gains rate *((price of your house + cost of improvements made)/27.5years)

If you both have AGI of under $150K and manage your rental yourself, you can deduct losses from the rental (including depreciation) from your ordinary income, so you don't stand to lose anything.

[Anonymous]

I don't understand all the talk about "rental losses" -- I've rented my rowhouse very profitably for 11 years, and will continue to do so. We make repairs/improvements every year to write off against the rental income, but we always make $20-$30K in profit.

[Anonymous]

Anonymous wrote:I don't understand all the talk about "rental losses" -- I've rented my rowhouse very profitably for 11 years, and will continue to do so. We make repairs/improvements every year to write off against the rental income, but we always make $20-$30K in profit.

So you are unable to comprehend that someone may not be in a situation where they generate a profit from their rental? And that their inability to deduct depreciation from their income and the reduction in basis when they decide to sell will further complicate the situation?

[Anonymous]

I understand that it's possible to rent at a loss, but in that case it makes no sense to rent.

It's like asking if you should take a minimum-wage job with a two-hour commute. The answer seems kind of obvious to me.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I don't understand all the talk about "rental losses" -- I've rented my rowhouse very profitably for 11 years, and will continue to do so. We make repairs/improvements every year to write off against the rental income, but we always make $20-$30K in profit.

So you are unable to comprehend that someone may not be in a situation where they generate a profit from their rental? And that their inability to deduct depreciation from their income and the reduction in basis when they decide to sell will further complicate the situation?

It sounds like the OP will make a good profit and won't need to deduct depreciation to make it work.

[Anonymous]

Again-- lots of misinformation. The recapture tax is not voluntary-- you will be subject whether or not you actually took depreciation and whether or not you lived in the house for 2/5 years.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I don't understand all the talk about "rental losses" -- I've rented my rowhouse very profitably for 11 years, and will continue to do so. We make repairs/improvements every year to write off against the rental income, but we always make $20-$30K in profit.

So you are unable to comprehend that someone may not be in a situation where they generate a profit from their rental? And that their inability to deduct depreciation from their income and the reduction in basis when they decide to sell will further complicate the situation?

It sounds like the OP will make a good profit and won't need to deduct depreciation to make it work.

If the profit is greater than depreciation - true. If the profit is less than the depreciation, and she cannot deduct depreciation from the ordinary income, then it will come down to the difference between net income from the property vs. capital gains tax on the annual reduction in basis.

[Anonymous]

Anonymous wrote:Assuming you either have an AGI of over $150K OR you do not manage the rental property yourself, you cannot deduct rental losses from ordinary income, so what you need to do is
- compare the income you bring every year after all the expenses and taxes from the rental with your capital gains rate *((price of your house + cost of improvements made)/27.5years)

If you both have AGI of under $150K and manage your rental yourself, you can deduct losses from the rental (including depreciation) from your ordinary income, so you don't stand to lose anything.

Ok, I assume you do know what you're talking about

Those losses (including depreciation) from renting - "passive loss" cannot be used to offset ordinary income, but it should be accumulated, right?
Now, question is - can you offset income from sales of the rental property (capital gain?) by accumulated losses from rental activity?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Also, 22:40, what do you mean when you use the word, 'basis?'

Your "basis" is the amount of your investment, and is used to calculate your profit. If the property is an investment property, you can deduct depreciation as an expense, but it reduces the amount of your basis. So if you paid $100,000 for the house, and you've deducted $50,000 in depreciation from income from the property over the years, your basis is $50,000 (assuming you haven't invested in any improvements to the property). If you sell it for $200,000, you pay capitol gains tax (assuming the investment otherwise qualifies) on $150,000 in profit. The real bummer on rental property is that, even if you haven't made a profit against which you can deduct the depreciation, you still have to lower the basis to reflect depreciation, so you owe more in tax when you sell. On the house you have as your residence, your basis is what you paid, plus the value of any improvements you've added over the years, on top of which you get to exclude $500,000 -- last time I checked -- in profit from tax altogether. I understand why they are promoting home ownership, but I don't understand why they want to actively discourage renting.

Same question to you - losses from rental activity cannot be deducted from ordinary income, but I assume can be carried forward until you sell that property. So, in your example - $150K profit should be reduces by the amount of carry-forward losses from all those years?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Assuming you either have an AGI of over $150K OR you do not manage the rental property yourself, you cannot deduct rental losses from ordinary income, so what you need to do is
- compare the income you bring every year after all the expenses and taxes from the rental with your capital gains rate *((price of your house + cost of improvements made)/27.5years)

If you both have AGI of under $150K and manage your rental yourself, you can deduct losses from the rental (including depreciation) from your ordinary income, so you don't stand to lose anything.

Ok, I assume you do know what you're talking about

Those losses (including depreciation) from renting - "passive loss" cannot be used to offset ordinary income, but it should be accumulated, right?
Now, question is - can you offset income from sales of the rental property (capital gain?) by accumulated losses from rental activity?

Wrong. Losses from renting can be used to offset ordinary income if you both manage your rental yourself and have AGI of less than $150K.

Exception for Rental Real Estate With Active Participation

If you or your spouse actively participated in a passive rental real estate activity, you can deduct up to $25,000 of loss from the activity from your nonpassive income. This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception.

http://www.irs.gov/publications/p527/ch03.html#en_US_2012_publink1000219121
I am not aware of any kind of "accumulation" of such losses.