My friend would have paid $40,000 more in taxes this year if he didn't have an a single family rental to depreciate, so perhaps gains vs inflation isn't as straightforward a measuring stick as you would assume.
Your friend will have to repay those taxes when he sells (assuming there is profit above the then-depreciated value). Seems like a lot of people don't know this.
Yes it is true that the tax rate is capped at 25% (which is sometimes less than the normal marginal federal rate you would pay) and there are ways to defer the tax bill further but it's not just like free money that the government gives up on collecting from you.
We have a bunch of rentals around here and we have no plans at all to ever sell. And when we die the tax basis for our kids will be the value of the properties at our time of death. (And I think they can even start using depreciation again.)
A lot of the simplification and rationalization that was the initial selling point for the tax bill somehow got traded in for large tax decreases for the wealthiest before it was signed. In my generous moments I think that they really did intend simplification and were simply bowled over by the other interests.
In my less generous moments I notice that they keep saying that they are doing A, and instead do B. Again and again.
This is part of the regressiveness of the US tax code. That’s a $40,000 transfer of wealth from those who cannot afford to own rental properties to those who can.
Not that I blame your friend for taking the tax break, I would too. It’s very hard to convince people to forgo benefits like that for the sake of society.
You are not wrong in general about the tax code favoring those with certain kinds of housing wealth.
But in particular regarding depreciation, the IRS will demand depreciation recapture at time of sale whether you actually took depreciation at any point in the property history or not. So if you don't want to pay double taxes you have to take the depreciation every year.
