Miss depreciation in the past will end up pay more tax when sale?

[kwyp]

If a rental property is sold, the accumulated depreciation needs to be recaptured. 

I run the tax software to test the below two situations

Situation 1.) Depreciation is deducted each year.

At the year when sell the property, the capital gain split into two parts:

a.) first  part is recapture accumulated depreciation, the recapture depreciation when sale makes the adjusted cost basis back to its original cost basis. so recapture is just an offset / write off depreciation out of the formular.  

b.) second part is the true capital gain part, capital gain = selling price - original cost basis 

Situation 2.) Miss the depreciation deduction in the past. At the year when sell the property, since recapture offset the past depreciations.  so no  matter what depreciation amount in the past, even no deprecation in the past, the recapture would offset the depreciation amount, make total deprecation as  zero (accumulated depreciation= recapture depreciation) 

Comparing these two situations, tax result has no much difference. 

my understanding is: Miss depreciation in the past will not put a taxpayer in a position that he has to pay more tax when sell. 

But I am not sure why we have such a popular idea like below: 

" If you miss depreciation in the past,  at the year when sale,  you will end up pay more tax because you have to do deprecation recapture" 

[sewcpa]

depreciation is "use or lose" so you have to recapture even if you failed to claim originally

Try to use 3115 to do something like a do-over on the missed depreciation.

[TaxGuyBill]

As was noted above, the depreciation that they COULD have taken (even if they did not actually take it) lowers the Basis and will result in a larger gain when the property is sold.

[kwyp]

What is your logic or calculation to come to a conclusion that using depreciation  results a bigger capital gain when the property is sold? 

Depreciation lowers the cost basis, recapture recover the adjusted lower cost basis  back to its original cost basis. both situations using the same formula to calculate capital gain. capital gain = selling price- original cost basis. Depreciation is not included with this formula.

My understanding is that there is no much tax difference whether a taxpayer take advantage of using  deprecation in the past or not. 

Just discuss about the tax result itself at the selling year. There has no much difference in tax for both situations. 

Please correct or verify my understanding;)

[TaxGuyBill]

You are correct that the gain in the year of the sale would be the same regardless if they took depreciation or not.  Maybe we misunderstood your original question.

But the long-term would be more tax due to not taking depreciation (missed deductions in prior years), so it is dumb to not take depreciation.

However, it is possible that missed depreciation in prior years could result in higher tax in the year of the sale.  Rentals often have passive losses that are not allowed.  Those losses often carry forward and may not be usable until the property is sold.  If you missed some prior depreciation, the passive loss carryforward will be smaller, resulting in more tax in the year it is sold.

[kwyp]

Thank you TaxGuy!

Is there a way here that people can have a one-on-one chat? 

[PhoebeRoberts]

" If you miss depreciation in the past,  at the year when sale,  you will end up pay more tax because you have to do deprecation recapture" 

This could more accurately be stated as, "If you don't take allowable depreciation, you'll pay more tax over the life of the property, because the 'allowed or allowable' rule means you'll pay tax on depreciation recapture regardless of whether you deducted that depreciation in the past."

Taking depreciation gives you more deductions (or a bigger passive loss carryforward that will free up in the year of taxable disposition) during the period the property was in service. Taking zero depreciation gives you no deductions for that period. In either case, you're going to pay tax on the same amount of gain in the year of sale.