Friday, February 12, 2010

Don’t Claim Depreciation?? Part IV: Passive Activity Rules

Continuing the discussion of whether to claim depreciation on a rental property or home office… The passive activity rules can suspend the deduction for depreciation so that it is not immediately available to offset ordinary income from such items as salary, interest, non-qualified dividends, self-employment earnings, and retirement/pension. Since rental losses are passive, it will still offset other passive income, either from the same property, other properties, or a flow-through entity such as a partnership, limited liability company (LLC), S-corporation, estate, or trust. But any suspended deduction is carried forward until adjusted gross income drops below $150,000, or positive passive income is realized, or the property is sold. So even if the depreciation deduction is suspended under the passive activity rules, you are almost always no worse off than if you did not claim the depreciation, and will usually be much better off.