Don’t Claim Depreciation?? Part III: Time Value of Money

Previous installments of this series discussed depreciation concepts for rental real estate property owners and taxpayers claiming the home office deduction, including “allowed or allowable” and capital gain vs. ordinary tax rates. Another reason to claim the depreciation when allowed is the time value of money. If you claim a depreciation deduction now and offset your salary or other ordinary income, but you don’t pay tax on the related capital gain until you sell the property, maybe 10 years or more in the future, you effectively earn interest or an investment return on the amount of deferred tax during the interim. This is a basic wealth-building concept that should be employed whenever possible. To take it one step further, you may use a Section 1031 exchange to defer the capital gain indefinitely or use the ultimate tax strategy: die while still owning the property and get a step-up in basis for your heirs so that the tax gain just disappears.