I don't think I fully understand the following text. I have never claimed the depreciation as my accountant told me I will pay more tax when I sell the properties. But, she might not be correct.
Can anyone explain it in more details?
Dear Tax Talk,
In regard to the question on Jan. 24 about unclaimed depreciation on a rental property: What happens when the rental property owners sell the property and must report prior depreciation?
-- Gary
Dear Gary,
One question always begets another and that's what keeps me writing. The question dealt with an individual who failed to claim depreciation on a rental property. When you sell a property, the depreciation claimed or the depreciation allowable (and that you failed to claim) is taxed at a higher tax rate.
When you sell a rental property that you have owned for more than a year, gain beyond your original cost is taxed at the preferential rate applicable to long-term capital gains. Currently the long-term rate is generally 15 percent, but, depending on your income level, it can be as low as 5 percent.
Allowed or allowable depreciation on the sale of real estate is termed unrecaptured Section 1250 gain. See line 19 of the 2006 Schedule D. This portion of the gain can be taxed at a maximum of 25 percent, but again, depending on your overall level of income, the tax can be as low as 5 percent to 15 percent.
If you were in the highest tax bracket when you claimed the depreciation, you could have saved 35 percent in taxes from the deduction, so there is still some element of preference in claiming depreciation deductions. The important thing to remember is that depreciation deductions are not optional since failing to claim them upfront will cost you at the time of the sale.
