Depreciation and Income

[badassprof]

A recent query about depreciation and taxes got me thinking. We have a home with an apartment and will sell before FIRE. (We live in a HCOL area and don't plan to stay here once we FIRE).  We'll likely have some significant capital taxes to pay, at least on the part of the home we rent -if we sold the house  today, we'd have about 650 in equity (of course, this could change). Due to our income, we can't take any of our rental expenses off our yearly taxes, but our accountant is keeping track of them for when we sell and/or our income drops.   One thought i have is for us to leave our jobs a year before we plan to move from our HCOL are and stay in the house one year without income in order to reduce our taxable income the year before we sell and, hopefully, pay less capital gains. Have any of you done that? Is one year enough? Anything else to consider in terms of this plan?

[SeattleCPA]

Here's one other item to consider...

Those passive losses have been accumulating over the years of ownership.

If you sell the property, they will all be "unlocked"in the year you sell. That's probably a high income year. Possibly a good outcome to net the capital gain and the unrecaptured sec. 1250 gain (aka "recapture") with the accumulated passive losses.

If you have a year or years of income less than $100K, you will use up the passive losses via that $25K per year active participant loophole. That route gets you the losses but they aren't worth very much.

[badassprof]

Thanks, Seattle CPA. Sorry if I am being dense here (taxes aren't my thing), but it sounds like what you're saying that it makes more financial sense to just sell and take the deferred tax benefits from the rental expenses then, which can then be applied towards what we have to pay on capital gains?

[SeattleCPA]

Didn't see this for a few days...

But here's my late answer/response...  You will unlock any passive losses you've accumulated when you sell the properties... and those passive losses will be more valuable in a high tax rate year... so you want to at least consider the idea that you "do everything at once"...

[badassprof]

Thank you!  That makes sense, SeattleCPA.