Skip to Content

Get a FREE assessment of your rental property. Start here!

Get a FREE assessment of your rental property. Start here!

Depreciation De-Mystified: An Introduction to Rental Property Depreciation

Dollar Bill Origami of a HousePart of the financial benefits of investing in rental properties come tax time is when investors get to deduct not only operating expenses, property taxes, and so on, but also depreciation. This key tax deduction works differently from the others as a result of the manner it is calculated and applied. On the other hand, failing to take a deduction for depreciation can set off certain unfavorable outcomes moving forward. Consequently, it’s imperative for Temecula rental property owners to grasp what depreciation is and why, indeed, you should be deducting it on your taxes every year.

As regards buying and improving rental properties, depreciation is the process used to deduct any associated costs. Rather than take one large deduction in the year the property was purchased or improved, the IRS has determined that rental property owners should classify those kinds of deductions over the useful life of the property. Therefore, essentially, rental property owners would be deducting a portion of their purchase and improvement costs (not operating or maintenance costs) each year for several years. This can considerably diminish the value of taxable rental income you mention or report on your tax return, thereby making depreciation worth the time it takes to calculate.

A property owner may begin taking depreciation deductions as soon as the rental property is placed in service, or simply put, ready to go as a rental. This is a good thing for property owners who encounter a vacancy promptly after acquisition or during renovations. How long you get that depreciation depends both on how long you own and use the property as a rental, and which depreciation method you use.

There are different depreciation methods that determine the amount you can deduct each year. Nonetheless, the most common one for residential rental properties is the Modified Accelerated Cost Recovery System (MACRS). Generally, MACRS is employed for a few residential rental properties placed in service after 1986. In this process, the expenditures of procuring and upgrading a rental property are spread out over 27.5 years, this is what the IRS considers to be the “useful life” of a rental house.

To identify at what amount your depreciation has to be each year, you’ll have to determine your basis in the property or the amount you paid for it. You can, in addition, be able to include some of your settlement fees, legal fees, title insurance, and other costs paid at the settlement. The tough part of this number is that you’ll have to separate the cost of the land from the building since only the rental house itself – and not the land it is built on – can be depreciated. Mostly, you will use property tax values to assist you to get what extent of the purchase price would need to be assigned to the house, or your accountant might elect to use a standard percentage.

After you have calculated an amount solely for the rental house, you’ll proceed one step ahead and figure out your adjusted basis. A basis in a rental property could be increased account for things like major improvements or additions, money spent restoring extensive damage, or the cost of connecting the property to local utility service providers. Basis can, additionally, decrease in the event of insurance payments you received to cover theft or damage and any casualty losses you took a deduction for already that were not covered by your insurance. Adopting your adjusted basis, you shall now calculate the amount of depreciation you can deduct on your income tax return.

Depreciation of a rental property is a valuable tool for investors looking to reduce their annual tax obligation. Nevertheless, rental property tax laws can be complex and change quite a bit as time progresses. As a result, it’s best to work with a qualified tax accountant to ensure that depreciation is indeed being calculated and applied correctly.

When you bring in Real Property Management Realevate Specialists, we can thus help you meet up with accounting professionals who can probably aid you in the course of your depreciation questions and more. Hiring our experts can help property owners make sure that there are no unpleasant surprises during tax time. For further beneficial information in connection with our Temecula property management services, please contact us online or call our Mission Valley office at 858-997-2100 or our Temecula office at 951-461-0100 for more information.

We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.