THE WANDERING TAX PRO
Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 45+-year veteran tax professional Robert D Flach.
Thursday, October 26, 2017
TALKING TAX REFORM - MORE ON THE DEPRECIATION DEDUCTION
If you want to talk about tax
loopholes that disproportionately benefit the “wealthy” let’s take a look at
the deduction for depreciation of real property. See my post "A Controversial Tax Reform Idea".
Those in the higher brackets – 28% to
39.6% - get, at some point (the deduction may not be currently allowed but
“suspended” to be deducted in the year of sale), an ordinary income deduction
for a truly phantom expense – depreciation of real estate.This deduction is merely a “loan” that must
be paid back – referred to as “recapture” - when the property is sold.But it is paid back at a maximum rate of
25%.So, the net benefit is 3% to 14.5%
on a non-existent expense.
As a general rule - to which, as with
any rule, there are certainly exceptions – real estate does not
“depreciate”.It “appreciates”.My father sold the home he purchased for
$13,000 in the 1950s for $75,000 in the 2000s – and the sale price was too low.
Real estate is an investment, just
like stocks, bonds, mutual funds, etc.You invest in rental real estate because you expect the building to
increase in value over time, often more so than stocks and mutual funds, and
because it generates “dividends” in the form of net “in pocket” rental income.
The deduction for depreciation of real
estate is like allowing those who purchase stock to depreciate the purchase
price of the stock as a deduction against the dividends paid out.
Being a phantom expense, the deduction
for depreciation of real estate distorts the true economic reality of the
investment activity.An activity
producing a positive cash profit becomes a deductible tax loss.
A good example is the truly huuuuuuge
loss reported on the one tax return of arrogant idiot Donald T Rump that we
have actually seen, almost a billion dollars, that caused him to avoid income
taxes that year and potentially on several carryback or carryforward years, has
been explained by many as the result of the deduction for depreciation on real
If the cocktail napkin scribblings
that is the “framework” for tax reform truly wants to do away with tax
loopholes that benefit the wealthy it should include the deduction for
depreciation of real property on the list.