From: worden@bouncer.nsc.com (Dennis Worden)
Newsgroups: misc.invest.real-estate
Subject: Re: Need help with rental depreciation
Date: 28 Aug 92 16:34:44 GMT
Organization: National Semiconductor Corporation

In article <1992Aug24.175244.8908@nb.rockwell.com>, guthrie@nb.rockwell.com (Karen Guthrie) writes:
|> 
|> In article <l95k6fINN3ld@jethro.Corp.Sun.COM>, brian@baja.Corp.Sun.COM (Brian Edge) writes:
|> > I am buying a rental house and was hoping someone could help me out
|> > as to how depreciation works.  Is there a set number of years you
|> > can depreciate?  How do you know how much each year is allowable??
|> > Is the amount that you depreciate deducted from your gross income
|> > for the year?
|> > 
|> > This is a single family residence, they can be depreciated can't they?
|> > 
|> > I know that a tax consultant can help me alot but money's tight.
|> > 
|> > thanks,
|> > 
|> > Brian 
|> Go get a good book like JK Lassers tax guide. There is a set number 
|> of years that you depreciate the property over ( I think it is 15 or 30)
|> for real estate.  Any rental property will qualify and yes you end up
|> filling out a form which takes it off of your gross income.  The rent
|> is income and the interest that you pay on a loan on the property is
|> tax deductable.  Depriciation is only a problem when you go to sell.
|> For instance if you buy a property for $100k and depreciate it by
|> $40k over the time that you have it and then sell it for $200k your 
|> taxable gain on that property will be $200k - $60k or $140k.  Thus 
|> you end up paying tax on the money you got to deduct later when you
|> sell it.  Depreciation is usually front weighted and therefore the 
|> first full year that you own something you will take the largest 
|> amount of depeciation.
|> 
|> Hope that this helps,
|> 
|> Karen

It's actually a little more complicated than this, but if it weren't, then
it wouldn't be taxes!!!  Everything that Karen says is true, upto a
gross income of 100K filing married (I don't know if the gross income
limit halves for filing single).   Between 100K and 150K there is a
phaseout of deductibility for "passive losses" which do apply to rental
property.  Beyond 150K income, all of your losses will go long term
passive, which means that they pile up and you get to apply them when you
sell the property.  They affect the reported profit on the house much like
the depreciation does.  Depreciation lowers the cost basis of the property,
and you report more profit upon selling, and long term passive losses 
lower the realized profit of the property, and you pay less in taxes.
I don't know what happens if you defer more in costs than the final selling
price of the property.

The deductibility phase out between 100K and 150K is limit on the maximum
available deductibility for that tax year, and any loss above that amount
is applied to the running long term passive loss.  If your yearly deductions
are less than the maximum available deductibility, than the phaseout doesn't
affect you.  In any event, the maximum deductibility is 25K per year, and
any overage is applied to your long term passive loss regardless of present
income.

My only comment is don't buy a real estate investment for the tax deduction.
Not only are the tax laws more liquid than most real estate markets, but
the tax rates rarely deflate like real estate markets do.  Remember, what
looks like a good tax deduction is not necessarily a good investment.

Good Luck

-- 
Dennis Worden, not representing $  When the TEAM succeeds, you succeed,
anybody, not even himself, in   $  but when the Team fails, you're FIRED.
any way shape or form.          $  Don't EMAIL me at worden@berlioz.nsc.com
Newsgroups: misc.invest.real-estate