Over the numerous years I have been in this industry I have heard some very ridiculous tax schemes, tax advice and just all around unfounded garbage of information. However, there is one fairly common misconception that is not as blatantly obvious as some of the others. “Where’s the depreciation on my rental?” Replies the prospective client after I ask them why their Sch E Rental properties are missing the depreciation deduction. “I don’t claim depreciation because when I sell the property I don’t want to have to pay taxes on any of the recapture.” And this is where I drop the bomb that the client was not expecting to hear. You HAVE to recapture depreciation, whether you claimed the deduction or not. Oops. That’s right, even if you did not take the tax savings deduction for depreciation you will still have to recapture it when disposing of your asset. It’s under the IRS doctrine of “Allowed or Allowable.” If your current tax adviser has given you this advice or if they are letting you get away with the filing of your returns without putting depreciation on your returns then either they don’t know the rules or they are not concerned enough with your tax planning to plan for your future. Take the deduction now and get your tax benefit before your forced to pay tax on recaptured depreciation that you received no benefit from.
Reference: http://www.irs.gov/publications/p544/ch03.html
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