We all know that a rental property's depreciation is part of your onging expense which could be used to offset your rental income.
However, if could backfire if your rental property's value drops. Here is an example.
An example
You bought a rental house for $105,000 and hold it for 5 years.
The building is worth $85,000 and you claim your depreciation cost of $3,000 per year. In five years, your total depreciation claim is $15,000.
This reduces your cost basis to $90,000 (=$105000-$15000).
Now if you sell your property at $95,000, even you have lost money (because you paid $105,000 for the property but sell it for only $95,000), you still have to pay tax now for the $5,000 gain over your new cost basis of $90,000.
However, if could backfire if your rental property's value drops. Here is an example.
An example
You bought a rental house for $105,000 and hold it for 5 years.
The building is worth $85,000 and you claim your depreciation cost of $3,000 per year. In five years, your total depreciation claim is $15,000.
This reduces your cost basis to $90,000 (=$105000-$15000).
Now if you sell your property at $95,000, even you have lost money (because you paid $105,000 for the property but sell it for only $95,000), you still have to pay tax now for the $5,000 gain over your new cost basis of $90,000.
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