Tax, depreciation

Dear wise fellows,

The rental market in my area is bad and the cash flows are negative. When filling tax return, adding the depreciation on the top makes it a big loss (I know, max $25,000) which almost wipes out my regular salary and all my exempts and tax credits become useless. And then if I sell the rental house serveral years down the road, the depreciation has to be recaptured and taxed. So I got screwed TWICE?!! How does that make sence?

Is there a way not to depreciate the rental property, or not to use the loss against the current regular salary but save the loss until selling? Help please…


If you want to talk about screwing yourself twice, NOT taking the depreciation expense will do it. When you sell the rental property, the depreciation you SHOULD have taken will still be recaptured anyway. No way around that. Meanwhile, because you did not take the depreciation expense, you cheat yourself out of a lower taxable income either in a later year or when the property is sold.

If your problem is that you have more net passive loss than you need, you can suspend your losses or a portion of your losses and carry them forward to the next tax year when they may come in handy. Suspended losses can also reduce your net capital gain when the property is sold.

Bottom line is that net passive losses that you can’t use this year are not really lost forever. They can be “saved” for use later. Don’t cheat yourself out a tax benefit just because you don’t have an immediate need for it.

You will also be able to avoid the depreciation recapture and the capital gain tax liabilities when you sell your rental property by completing a 1031 exchange and acquiring other rental property.

The 1031 exchange is a great way to reposition your real estate portfolio, especially in your case when you are in a bad market. You can sell your existing rental property and acquire other rental property in a different geographic area that will have better cash flow and/or better upside potential.