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Real Estate
Reply to "Depreciation recapture vs. suspended losses on sale of property"
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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]I don’t think you can offset the depreciation recapture in any case.[/quote] This is my understanding. This is why we sold our house vs. renting it out. You can't offset the losses with w-2 income (unless you're in the "business of real estate," but the depreciation continues to reduce your basis, and you lose the residence "safe harbor," so you get hammered on taxes when you sell. The only way it makes sense is if you plan to keep the house forever and let your kids inherit it, and then they get the stepped up basis (Biden has the elimination of stepped up basis in his platform, fyi). However, in the meantime, you have the hassles and expense of maintenance (which you also can't deduct). Unless you're in a market that has a ton of room for appreciation, it makes more sense to put your money in a the market. [/quote] It's in close-in NOVA, about a 15-minute commute from the Pentagon. It has appreciated about $40k in the last two years, but who knows if that will continue. I don't know that I could stomach putting all that money in the market, though, so I think a ton of it would just sit in my bank account.[/quote] Just do the math and see. If you sell now, you will pay zero tax on the $40k. Run a time value of money calculator at some interest value that corresponds to a interest rate you'd get in a CD or some safe investment (although I don't think it's smart to stay out of the market). If you can refinance and rent will cover all rental expenses plus produce some income, calculate taxes on that income (you have to pay taxes on it, even though they won't let you deduct losses), and calculate the amount of interest you save by paying down your primary mortgage with the net income. Make sure to allow for some time when the house isn't rented (painting, etc in between renters). Then calculate the depreciation on the house over time and calculate what your taxes would be when you sell. Remember, it's not a guarantee that real estate prices always go up. Particularly in Arlington, it is possible that the bulk of the appreciation has already happened. Prices could even go down. When I did this math, it was basically a wash. The hassle of renting and maintaining a home wasn't worth it. Particularly when you consider how illiquid real estate is as an investment. Just like there's no guarantee that real estate prices always go up, there's no guarantee that houses always sell quickly if you need the cash. [/quote] Thanks for this. It’s in West Alexandria which I feel like still has some room for price appreciation (maybe like 20k?) in the next few years. Refi will allow rent to cover all expenses, but not be enough that we will pay income taxes on it right now with depreciation. I was doing some research a[b]nd suspended losses including depreciation can be used to offset W2 income. [/b]I will run the calculations you suggested above. I also kind of like the idea of keeping it in case something happens with either of our jobs so that we have a cheaper place to live. [/quote] I would check with your cpa about this. That is not my understanding, unless you make less than $100k a year (you can deduct a limited amount) or you are the “real estate business” (owner of one house is unlikely to qualify). https://www.nolo.com/legal-encyclopedia/can-you-deduct-your-rental-losses.html [/quote]
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