Guys, I have a 2 bedroom garden Duplex in Manhattan that I bought in 2005. Realistically even if I move back to NYC i won't live there again as it will be too small. I paid 1m and it's probably worth 1.5m. I have made minimal improvements (lets say zero for now). I rent it. I'm doing my 2008 taxes and one of the things PWC want to know is depreciation expense. Certainly some of the fittings have deteriorated - The AC units will likely have to be replaced soon. How do I account for this - is there a rule of thumb? The place was gut renovated right before I bought it. I want to claim the proper amount of depreciation, no more, no less. Any advice would be appreciated.
Really don't take this as any part of truth but I was under the impression depreciation was standard over the life of an investment property. I believe it's the purchase price divided by 27.5yrs to get the yearly depreciation?? Is that at all right? I'm actually buying a property in Austin and that is what I was counting on at least. What I'm not sure about is what happens when you sell the house. Who knows.
Oh and only the value of the structure can be counted. And I have no idea how you figure the cost of land vs. the cost of the actual structure that can physically depreciate. Especially here in the city where so many apts share the land.
I did the 27.5 year straight depreciation when I was renting out a condominium and it worked fine for my actively managed rental. Some of the accounting/tax rules were different for passively managed rental property (meaning you hire a management company to find renters, handle repairs, etc.) And when I sold the property, all that wonderful depreciation came back to haunt because I had to pay tax on the difference between the selling price and the depreciated value of the property. All this was more than 10 years ago so things may be different now but that was my experience. Good luck.
I own rental houses and it is 27.5 years. Are you using TurboTax? If you are using the right version it will handle this for you with minimal effort. Technically I believe you can depreciate some assets (i.e. AC and other equipment) over shorter lives but you need to do an initial allocation of value to these assets in order to do so. The last poster is right on about depreciation and selling because as you depreciate the basis you pay taxes on the difference between the depreciated basis and sale price versus what you originally paid and final sale price. ITs really worth it to live in the place and sell it as residence (don't pay taxes on the profit) but I forgot the exact rules around that. Something like 2 out of the last five years I believe. You really need to think about the tax consequences of renting it if you never plan to live there again!!
When you think about the depreciation and the tax on the profit over the depreciated value what you are really doing is deferring tax to a later year. your 1/27.5th reduction in value comes off income to reduce your tax burden this year. If you didn't have it you would pay higher taxes in the current period. When you go to sell, you have to pay tax on the difference between the basis (after depreciation) and the sales price (assuming you get more than the basis. If you hadn't depreciated you would have a higher basis and thus a lower tax burden upon sale. When you compute in time value of money (a dollar today is worth more than the same dollar next year) you usually come out ahead. Just be mentally prepared to pay the taxes or have a strategy to minimize the tax burden. Any major improvements to the house and some repairs may be used to raise the basis and help offset gains at the time of the sale so keep good records of what your basis is when you start renting and the cost of any improvements.
One other problem you have is that if you make a certain income--maybe $160K or so--you can't take an overall loss on a rental property because you are too rich! If you own that place and now earn income in HK, you probably are too rich. What you do, though, is bank that loss in an imaginary tax account and it accumulates, and you can take it whenever you sell the property. Obviously, some proper tax advice may be needed.
if you have passive losses (real estate, for example), just structure your money making opportunities to include passive gains (S-corp/partnership structured business) and you'll be just fine...
