If you own property, you need to know about the guidelines for rental property depreciation when it comes time to file your taxes.
Whether you’re new to the rental business or you’ve owned and rented out property for years, it’s crucial to keep on top of the depreciation rules.
Read on to learn more about rental property depreciation and how you can calculate it so you’re always on top of your game.
Rental Property Depreciation Basics
When you’re filing taxes and adding deductions, the one for property depreciation works differently than other forms of deductions. The term depreciation refers to the process you use to deduct the cost of buying and then improving your property.
Instead of taking a single large deduction in the year you’ve purchased or improved your property, the process of depreciation distributes the deduction across its useful life. The IRS has very stringent rules regarding depreciation, so it’s crucial to understand how it works.
There are a few main requirements that the IRS will use for the depreciation of rental property. First, you must be the owner of the property. This applies even if you’re still paying for it, such as owing on a mortgage.
Second, you must use your property in your business, or as an income-producing property such as renting it out to tenants. The property that you own has what’s called a “determinable useful life.” This means it can wear out, become obsolete over time, or go down in value.
Finally, you can use rental property depreciation as long as your property is expected to last or be used for income for more than one year. If your property is no longer being used for income, you cannot use it for depreciation purposes on your taxes.
Making Improvements
When you make major improvements to your rental property, the cost you incur can be deducted over time. These improvements can be anything from installing a new roof to adding a new HVAC system.
Make sure you check the current IRS guidelines to find out which improvements can be deducted for your rental property depreciation. Some items, such as landscaping, will not qualify since this is an improvement to the land and cannot be deducted on your taxes.
If you replace the entire roof of your property and use quality roofing materials, this can be deducted on your tax return. A roof replacement is a major component of your property, so it’s what the IRS considers a “capital improvement.”
To calculate the depreciation of a new roof, it’s usually depreciated over a recovery period of around 27.5 years. This depreciation is calculated using what’s called a straight-line method that uses a set number of years and divides it by the total cost of the improvement.
A new roof is just one example of something you can do to not only improve your rental property but also to deduct on your tax return each year. Make sure you keep all receipts in case you need them later to prove the cost to the IRS.
Good record-keeping is crucial when it comes to claiming costs for your rental property. Always talk to a professional tax accountant or attorney if you need help filing your taxes after making improvements.
How to Calculate Depreciation
For most of your deductions of improvements to the rental property you own, you’ll use the straight-line method. Currently, the IRS has the recovery period designated at 27.5 years.
So, how would you calculate this on your returns to determine what to deduct each year? First, you’ll need to subtract the value of the land from the actual cost of the building to get the building’s value.
Let’s say your land value is approximately $40,000 and your building cost you $100,000. You’d take $100,000 and subtract $40,000 from it, leaving you with a final building value of $60,000.
Next, you’ll need to divide the newly-calculated building value by 27.5, which will equal the yearly allowable depreciation deduction. This deduction is what you will use each year to claim on your taxes.
If your building value is $60,000, divide it by 27.5 to get a final number of $2,181. This is the amount you can claim each year for the depreciation of the building itself. It’s important to note that if you own a commercial building, the total number of years will be 39 instead of 27.5.
If you’re ever in doubt about how to correctly file your rental property depreciation, there are several calculators and articles online that can help you. You can also talk to a professional who understands the tax nuances involved with owning rental property.
Any improvements you make to your rental can give you a little more money in your pocket at tax time. Just make sure you’re using the correct, most recent calculations so you’re adhering to the IRS guidelines. Always keep records of anything you do to improve your property every year.
Making the Most of Your Rental Property
When it comes to getting more from your rental property, understanding how rental property depreciation works is crucial. This simple calculation will help you file your taxes accurately and give you the best return possible.
When in doubt, always consult the expertise of a CPA or your business tax accountant. They can walk you through the process and ensure that you’re doing everything correctly so you can get the most money back possible.
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