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Old 07-17-2013, 08:40 PM
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Should I split up my depreciation

I am 27 years old and just bought my first income property. I can expect to be in the 25% bracket for the next thirty years or so and if I'm fortunate I might even reach a higher one. My question is should I use segmented deprciation or simply straight-line? It seems I might be better off taking the deduction when my income is higher and not front loading the depreciation. Then again, I'd also have to consider whether the passive activity loss limmitations will play a greater role now or later. If I end up with more than a $25k loss, the extra deductions won't matter. Finally, I'd have to think about how much return I could get from the money I save in taxes now. Cash today is better than cash tomorrow, but is it significant in this case? Im not sure.

I'd be interested to hear some thoughts. Thanks!



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Old 07-18-2013, 07:29 AM
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Quote:
Originally Posted by benj4786 View Post
#1: My question is should I use segmented deprciation or simply straight-line? It seems I might be better off taking the deduction when my income is higher and not front loading the depreciation.



#2: Then again, I'd also have to consider whether the passive activity loss limmitations will play a greater role now or later. If I end up with more than a $25k loss, the extra deductions won't matter. Finally, I'd have to think about how much return I could get from the money I save in taxes now. Cash today is better than cash tomorrow, but is it significant in this case?
#1:
Depreciation is an annual income tax deduction that allows you to recover the cost or other basis of certain property over the time you use the property. It is an allowance for the wear and tear, deterioration, or obsolescence of the property. You must use the Modified Accelerated Cost Recovery System to depreciate most property. Rental Property can be an effective tax shelter due to Depreciation; Be sure to Depreciate your Rental Property because the IRS assumes that you take it! If you don't take the Depreciation,you will have to pay taxes on the property when you sell it through Depreciation Recapture taxed at 25% as ordinary income s long as your marginal tax rate is 25% or higher. Residential property subject to the 27.5
year recover period is defined as a rental building or structure for which 80% or
more of the gross rental income from dwelling units. If you occupy any part of the building, the gross rental income includes the fair rental value of the part you occupy. You cannot claim the section 179 deduction for property held toproduct rental income.



#2: correct; Cash today is better than cash tomorrow due to time value of money. Purchasing rental properties can be a good way to build long-term wealth while also enjoying positive current cash flow. Rental property provides a number of potential advantages for savvy investors who can navigate a tricky real estate market, including capital appreciation and protection from rising inflation as long as its value appreciates instead of depreciated.


"
Then again, I'd also have to consider whether the passive activity loss limmitations will play a greater role now or later. If I end up with more than a $25k loss, the extra deductions won't matter."======>The full $25,000 deduction of passive loss from non-passive income is only available to taxpayers with a modified adjusted gross income of $100K or less ($50K or less if married filing separately). It phases out above $100K and ends entirely for earners with incomes of $150K and above.More than a $25k loss can be carried over and when you dispose of th epty , it can reduce your unrercatured depreciation taxed as regular ordinary income.





If you can purchase rental properties cheaply when the real estate market is at its lowest point, you may be able to make a great deal of money when the market recovers. The real estate market ebbs and flows; and when the market for apartments, homes and rental properties picks up, the value of the properties you hold can go up substantially. This can allow you to build long-term wealth over time by purchasing distressed properties, fixing them up and selling them in a strong real estate market. In the meantime, you can enjoy strong positive cash flow by renting out those properties while you wait for their value to rise.
Inflation represents a serious risk to any portfolio. Even a low level of inflation can slowly eat away at your purchasing power over time, leaving you with far less disposable income than you had anticipated. Real estate tends to perform very well during periods of high inflation, and holding rental property can provide important protection against rising prices. While holding all of your assets in real estate can be a risky proposition, diversifying part of your portfolio into rental properties can be a good way to hedge against possible high inflation in the future



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