Your Money

Excerpted from the Chicago Tribune
Sunday, February 25, 2007

Q: I own a condo and have been renting it to my parents. I have been deducting interest and taxes as an expense on my taxes, but I never took depreciation. I assumed that if I did, I would be setting myself up for some enormous tax bill when I sold it. Your recent column seemed to suggest I was making a mistake.
-- D.G., Chicago

A: Yes, you have been making a mistake. But you can correct it now. When you rent out a condo or are using a portion of your home to conduct business regularly, you are entitled to take depreciation. In other words, at tax time, you receive a deduction for the wear and tear on the value of your property. Year after year, you deduct a portion, and that can lower your taxes.

Some people don't deduct depreciation because they worry -- like you have -- about incurring a giant tax bill when selling the property. But you only hurt yourself with this approach. You miss out on a deduction you could use to lower your taxes each year you have the property. Then, when you sell, the IRS assumes you have been depreciating the property, even if you didn't. So you have to pay taxes on the amount you should have depreciated anyway.

If your mistake is only in the past three years, you can file amended tax returns, and maybe get some money back from the IRS.

Don't kick yourself, however, for making a mistake. Only about 22 percent of people with investment property actually depreciate it. One reason is because calculating depreciation is complex. But never fear, TRexGlobal.com is here.

It's a new, free Web site that operates like tax software such as TurboTax, only it concentrates on the complexities of depreciation and does the calculations for you in a snap.

Started by Pankaj Shukla and Narinder Sandhu, who worked for TurboTax's parent, the two blended their real estate investing backgrounds with tax software design.

Their tool, called "Depreciate 'Em," is as easy as tax software to use. It can save you thousands of dollars because it doesn't simply calculate depreciation one way. It does it multiple ways for various items that make up your property.

What you might not realize is that if you have residential rental property, you depreciate your stove one way and patio another. Even the water pipes and shrubbery have their own depreciation schedule. You depreciate the value of the water pipes over 27.5 years, but the shrubbery gets 15 years.

Obviously, doing this by hand could be maddening. But to use "Depreciate 'Em," you simply start with your closing statement from your property purchase, match words from the statement to the choices on the Web site, and the calculators do the work for you. Even your settlement costs work for you.

Then you move to items in the property. Say you have a clothes dryer, but lack a receipt. The site shows you the range of prices in the market for dryers -- from $281 to $674. The site shows you that the midpoint for dryers is $484, which you could surmise could be acceptable to the IRS.

Contact Gail MarksJarvis at gmarksjarvis@tribune.com or leave a message at 312-222-4264.
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