DH and I are toying with the idea of buying a rental house. I have some questions about depreciation with respect to income taxes.
As I understand it, we declare the rent as income. We deduct the interest on the mortgage, the real estate taxes, the insurance, the cost of repairs, etc. We also deduct an amount for depreciation. The income that is left after deductions is taxed.
If and when we sell the property, we pay capital gains not only on the difference between the selling price and our purchase price, but also on the depreciation amount.
So I guess my first question is, am I correct?
Because my second question is, what's the logic behind depreciation? I understand deducting the costs of maintenance, because that's expenses that are necessary to keep the house rentable. But since they keep the house rentable, it's not depreciating, right? I mean, it's not becoming any less capable of generating income. All I can think of is that it makes me pay capital gains tax instead of regular income tax on the purchase price of the house. What am I missing?
Thank you!