Let’s talk about depreciation of residential rental property-just residential rental property. And the building structure (often a house) in particular.

If you are an active participant in the rental activity, then depreciation is allowed (***Don’t stop here, deciding this doesn’t apply to you because you don’t want to depreciate. That is unwise). This is different than being a material participant. The bar for being an active participant is much lower. A simple explanation (and not perfect) is this: if you make any decisions regarding the operation of the rental property, then you are an active participant. Things like: yes or no to maintenance, yes or no to an applicant, raising or lowering rent, yes or no to tenant application criteria, what the criteria is, and what flooring to put in. Most landlords are active participants, even those making use of a Property Management company.

Occasionally I’ll run into folks who decided they didn’t want to depreciate their rental property (the building structure) or a tax pro actually advised not to depreciate, because they would have to “pay back the tax benefit of depreciation” with depreciation recapture when they sell. That is not a particularly wise decision, because depreciation recapture applies to allowed or allowable depreciation for residential rental property. This means whether or not you depreciated, if you have a gain when you sell, then you have to “pay back the tax benefit of depreciation” via depreciation recapture whether or not you actually depreciated the property. Don’t get stuck with the “if you have a gain” and think that “I won’t have gain, so I”m not worried about it” The gain calculation uses the depreciation taken or that should have been taken to effectively increase your calculated gain (depreciation recapture can considered part of the gain, making that portion of the gain taxed at usually a higher rate). This makes it more likely that you will have to pay depreciation recapture.
Another reason that not depreciating is unwise, is the time value of money. It is generally viewed as better to have money earlier rather than later so that in theory at least you can increase it.

In summary, when depreciation is allowed and there is no other deduction option, depreciate.

Some resources: IRS Pub 946 discusses depreciation. The IRS website discusses depreciation as Topic n. 704.

***This article is focused on federal law, the laws in your state may differ. The concepts presented here are simplified, written for common situations, and may not fully address your tax situation. This article should not be taken as tax advice for your tax situation. It is written for informational purposes only. ****