Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (7) | Ignore Thread Prev | Next
Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120806  
Subject: Re: rental property depreciation recapture Date: 3/14/2008 7:07 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Peter, this is the best explanation so far I have ever researched and found on this subject.

Thank you. There must be better ones out there. Just keep looking.

I understood 97% of your reply,

Wow! I only understood 75% of what I wrote. ;-)

except your sentence at the end: "The capital gain portion is currently taxed at a rate less than your ordinary losses from the passive activities". Can you elaborate a bit or give an example?

Sure.

No matter what your tax bracket, long term capital gains are taxed at a lower rate than ordinary income. (Well, unless you have so little income that you are effectively in the zero percent bracket.) The passive losses you are accumulating - the amounts in excess of $25k per year - are almost certainly ordinary income. When you use them, they reduce your ordinary income and save you tax dollars at your marginal rate.

Long term capital gains are taxed at no more than 15%. The long term capital gains from selling a rental property (assuming that you hold these long enough to actually have a gain on the properties) get this beneficial tax rate. AND that long term capital gain also allows you to use a portion of the deferred passive losses.

So you reduce your ordinary income at the same time you recognize long term capital gain income. If the amounts happened to be equal, that means more of your total income will be taxed at the lower capital gain rate.

Granted, from an overall perspective it would be nice to use those losses now rather than later. But since the tax law prohibits that, you still get to use them, even if it is some time down the road. And when those losses are finally freed up, they're going to help improve your overall tax rate in the year you do get to use them.

So, like I said earlier, just take the depreciation now, accumulate up the losses, and you'll put them to use down the road when you finally sell. When you do that, you'll be better off than you would have been had you not depreciated the property at all.

--Peter
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (7) | Ignore Thread Prev | Next

Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
2013 Feste Award Voting Begins!
Who will win the 2013 Feste Award? Vote now for the Fool that most exemplifies the Fool Community mission of Learning Together!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Post of the Day:
Tax Strategies

TMFPMarti-Feeling Good
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement