Beach House Depreciation and Eventual Recapture

[_Mix_]

We are looking at buying a house at the beach.  We will plan on using it much more than 10%. Lets say  we will use it 126 days and it will be rented at FMV 84 days.    (60/40)  .

Let's also say that house cost $375K and the the non-land basis is $275,000 .  
And finally, we'll say that the incoming rental income will be 25K - just rental mgmt expenses = 20K.

The first Q is, do we get to depreciate the house, an if so, by what amount . 
Lets say we sell the home 10 years later at a price of $500K, on what amount would we pay taxes.

There will be a follow on Q, but I want to get this straight first .

[tagteam]

A threshold question and a comment:

You only have management expenses and no other expenses? There should be real estate taxes, maintenance, repairs, utilities, etc.

No one knows what you will pay if you sell in 2 years, much less 10 years as the law can change, perhaps dramatically. At this time, you would have to consider depreciation recapture and capital gains tax.

[tagteam]

Also, note that you can take depreciation deductions on the structure (house) but that may be limited by Section 280A (the vacation home loss rules).

Frankly, you should really consult with a local tax professional for your situation.

[_Mix_]

noted - the expenses were dumbed down as the Q is really based around depreciation only - 
I'm trying to get at whether the
a) vacation (as opposed to investment) property can even be depreciated
b) and if so, does it get apportioned as per personal/rented days

[tagteam]

a) Yes, it can be depreciated

b) Yes, it does get apportioned

[_Mix_]

Thank you .  

So then, if I got this right, in my simple example (with the way things are today) , while $100K in depreciation would have been available over the ten years, we would just depreciate $4K a year , and more importantly to me , we would only need to recapture $40K  (not $100K) when the property is sold.

[tagteam]

Unfortunately, it's not that simple.

When you sell, any depreciation recapture will be based upon the amount that was allowed or allowable.

If you have other expenses, that figure could very well be $0 because depreciation deductions will be allowed only after all other expenses are deducted from your rental income. Once your other rental expenses reduce your rental income to $0, depreciation will neither be allowed or allowable.

[AmeliesUncle]

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@_Mix_ wrote:

we would only need to recapture $40K  (not $100K) when the property is sold.

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You have the general idea right.  The MOST amount of the depreciation that would be taxed in the scenario is $40,000 (but it could be less).  That is taxed at your ordinary tax rate.  However, if these are short-term rentals, it is depreciated over 39 years, not 27.5 years.

In your original scenario, you would also pay tax on the $125,000 of profit (in addition to the $40,000 of gain due to depreciation).  That would be taxed at long-term capital gains rates, which is usually 15% but could be 0% or 20%. 

However, that 'extra' $165,000 of income when it is sold ($125,000 profit plus $40,000 due to the depreciation) could affect other things on your tax return.  It could be subject to the 3.8% Net Investment Income Tax.  Or it could reduce (or eliminate) some types of deductions or credits.

As Tagteam mentioned, after you factor in depreciation, real estate tax, insurance, mortgage interest, repairs, utilities, etc., most likely your annual profit for the rental will be fairly low, or possibly even a loss (whether or not a loss would be deductible gets much more complex).

[Critter-3]

If you don't want to talk to a tax pro then educate yourself by reading the IRS pub 527 ... look under vacation home ...  https://www.irs.gov/pub/irs-pdf/p527.pdf