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UK Property Depreciation

UK Property Depreciation

Old Mar 9th 2018, 8:11 pm
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Default UK Property Depreciation

It's been a while!!! Lot's has happened in our first year here, however we are just finalizing our first US Tax Return.

We kept some UK residential property.

Is there a best route to go with regards to depreciation? Obviously UK property doesn't tend to depreciate in the same way US does so wonder if we're best off depreciating or putting the full value through?

My concern in depreciating is that we are building up a larger capital gain here.

Any thoughts or experiences would be great!
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Old Mar 9th 2018, 9:59 pm
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Default Re: UK Property Depreciation

You must depreciate, it's not optional - as is the claw-back on sale, .... even if you didn't depreciate!

It's 2.5% per annum, i.e. straight line over 40 years, on the value of the building, but not the land.

A good starting point is usually to take 80% of your purchase price as the value of the building, but the land might be worth more than 20%, if for example it has development potential e.g. there is the possibility of it being demolished and replaced with flats or a commercial development, or if the building is decrepit.

On the other hand, the value of the land might be less than 20% of your purchase price, for example of your property is one of twenty flats, or if the house is large or fancy, but in a bad location.
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Old Mar 9th 2018, 11:15 pm
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Default Re: UK Property Depreciation

Interesting. My CPA said if I really wanted to I could put down a $0 for depreciation but it was unusual.

Maybe he didn’t fully understand my question.
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Old Mar 9th 2018, 11:17 pm
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Default Re: UK Property Depreciation

Originally Posted by The Moose View Post
Interesting. My CPA said if I really wanted to I could put down a $0 for depreciation but it was unusual.

Maybe he didn’t fully understand my question.
Well, as Pulaski implies you can. But given it's going to be clawed back on a sale, I can't see why you would.

Last edited by Giantaxe; Mar 9th 2018 at 11:20 pm.
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Old Mar 9th 2018, 11:19 pm
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Default Re: UK Property Depreciation

What do you mean by claw back?
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Old Mar 9th 2018, 11:25 pm
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Default Re: UK Property Depreciation

Originally Posted by The Moose View Post
What do you mean by claw back?
Depreciation reduces your basis in the property so potentially increases any capital gain:

Paying Back Depreciation on a Rental Property | Home Guides | SF Gate
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Old Mar 9th 2018, 11:45 pm
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Default Re: UK Property Depreciation

Originally Posted by The Moose View Post
What do you mean by claw back?
If you bought a house for £150,000 and depreciated the building cost of £120,000, and say you depreciated it for ten years, you would have deducted 25%/£30,000 against your taxes, at the rate of £3,000/yr. So now the "tax written down value" of the building is £90,000, plus the land at (undepreciated) historic cost is £30,000, so the aggregate base cost for tax purposes would be £120,000.

Now you sell the home for £200,000, and the gain is the difference between the sale price and the tax written down value, which would be £80,000 in this case, which equals the £50,000 increase in value plus the £30,000 of depreciation which is "clawed back".

Does that make sense?

BTW remember that depreciation saves you income tax at your marginal tax rate (now 22% or 24% for most people, previously 25% and 28%), but that you only pay capital gains tax in the US at, IIRC, 20% (previously 15%). So there is a gain to most people between saving income tax and later paying CGT on depreciation which is clawed back.

Last edited by Pulaski; Mar 9th 2018 at 11:55 pm.
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Old Mar 10th 2018, 12:01 am
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Default Re: UK Property Depreciation

Yes it does (and as I understood it). If you didn’t depreciate for 2 of those 10 years then your only have depreciated £24k as opposed to £30k so (ex rate aside), you’d have a smaller capital gain.

Just seemed like a good idea as we are making a loss this year not to depreciate, however as it can be carried forward, I guess I’m reality it doesn’t make much difference at the end of the day.
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Old Mar 10th 2018, 12:09 am
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Default Re: UK Property Depreciation

I haven’t - because on paper we haven’t made any money to offset!

As the loss can be carried forward, I should hopefully be able to offset it at some point in the future.
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Old Mar 10th 2018, 12:12 am
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Default Re: UK Property Depreciation

Originally Posted by Pulaski View Post
BTW remember that depreciation saves you income tax at your marginal tax rate (now 22% or 24% for most people, previously 25% and 28%), but that you only pay capital gains tax in the US at, IIRC, 20% (previously 15%). So there is a gain to most people between saving income tax and later paying CGT on depreciation which is clawed back.
I don't think so. Depreciation recapture is at the ordinary income rate:

https://www.kiplinger.com/article/in...nsequence.html
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Old Mar 10th 2018, 12:12 am
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Default Re: UK Property Depreciation

Originally Posted by The Moose View Post
I haven’t - because on paper we haven’t made any money to offset! ....
Sorry, I was assuming you had income.
.... As the loss can be carried forward, I should hopefully be able to offset it at some point in the future.
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Old Mar 10th 2018, 12:13 am
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Default Re: UK Property Depreciation

Originally Posted by Giantaxe View Post
I don't think so. Depreciation recapture is at the ordinary income rate:

https://www.kiplinger.com/article/in...nsequence.html
Hmm, you're probably right. It has never impacted me.
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Old Mar 10th 2018, 12:14 am
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Default Re: UK Property Depreciation

Originally Posted by Pulaski View Post
Sorry, I was assuming you had income.

Of course we have income but on paper have made a loss last year
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Old Mar 10th 2018, 12:22 am
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Default Re: UK Property Depreciation

Originally Posted by Pulaski View Post
Hmm, you're probably right. It has never impacted me.
The advantage of depreciation on an appreciating asset is that you avoid paying taxes in today's dollars and pay them in dollars possibly much further down the road. But... it can really suck if the depreciation recapture pushes you into a higher tax bracket in the year of sale.
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Old Mar 10th 2018, 12:24 am
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Default Re: UK Property Depreciation

Originally Posted by Giantaxe View Post
The advantage of depreciation on an appreciating asset is that you avoid paying taxes in today's dollars and pay them in dollars possibly much further down the road. But... it can really suck if the depreciation recapture pushes you into a higher tax bracket in the year of sale.
I hadn't thought of that!
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