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Financial Planning / Tax Strategies


Subject:  Re: rental property depreciation recapture Date:  3/14/2008  5:04 PM
Author:  ptheland Number:  99457 of 132798

Just keep depreciating the properties. When you sell, the accumulated losses on the property sold become allowable without regard to the $25k annual limit. So you get the benefit in that year.

And that can work to your advantage. You get to write off the deferred losses as ordinary income. That saves you taxes at your marginal rate. But the capital gain due to the depreciation taken is limited to 25%. So if you're in the 28% or higher bracket, you come out ahead. Even if you're not in a higher bracket, you still come out even.

Further, if you have a capital gain because of the sale, that could allow some of the deferred losses from the other properties to be released and used. The capital gain is part of your passive activity income. So the deferred passive activity losses can be used to offset that income. And you again have the chance for some tax rate arbitrage here. The capital gain portion is currently taxed at a rate less than your ordinary losses from the passive activities. So you get to recognize capital gains and ordinary losses. The best of both worlds.

IOW - don't try to fight the system. It's not a bad system at all. You just don't get to have it all right away.

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