Rental properties depreciate over time, and the IRS permits property owners to deduct this loss in value from their taxes – potentially saving rental investors thousands over their investments’ lifespans.
For depreciation deduction purposes, your property must be used in rental capacity and possess a finite useful lifespan; 27.5 years is usually considered acceptable as rental property lifespan.
Cost Segregation
Cost segregation is a federal tax strategy designed to lower the taxable income from real estate properties. It works by segregating personal and real assets within commercial buildings, and writing off more depreciation than usual during your first year as owner, making your investments work faster for you.
Cost segregation involves experts reviewing your building costs and allocating them into categories with shorter depreciation periods – items depreciated over five, seven and 15 years or written off faster using bonus depreciation may fall under this heading. They typically utilize documents such as construction records, inspection reports and blueprints in this process.
Cost segregation studies allow you to lower real estate taxes in the early years of ownership and free up cash that can be invested elsewhere. For example, if you’re an existing single-family landlord looking to expand their portfolio with office buildings, depreciation from your home’s costs may help qualify you for loans to finance new office purchases.
Repairs and Maintenance
When depreciating rental property, the IRS lays out three rules you should abide by when depreciating it: your cost basis, recovery period, and method. Cost basis refers to the original purchase price (including any loans taken out to pay for it).
Your rental property base can expand when you invest in any improvements that enhance it, including appliances or furniture purchases, roof renovation, repairs or maintenance – these costs do not depreciate over time.
The recovery period, or time it takes your property to wear out or be damaged, should typically be set at 27.5 years; however, this timeframe can differ for different properties and if damaged rentals are destroyed or sold/exchanged for something else you should subtract the costs accordingly using the MACRS recovery method of depreciation.
Depreciation Schedules
Calculating depreciation requires dissecting costs separately as assets such as furniture have different depreciation schedules than roads and fences, enabling you to claim maximum deductions for your rental property.
Raw land cannot be depreciated; however, if you build on it and spend money grading, clearing, seeding, and planting shrubs and trees on it you can depreciate those costs.
depreciating rental property can be one of the best ways to lower property taxes, provided you maintain accurate records and follow IRS rules as closely as possible – failure to do so could result in costly tax penalties. Consulting with a professional before starting depreciating could ensure you’re making the most out of your investment.
Taxes
Depreciation isn’t mandatory, but it can be an enormously valuable tax deduction that could save rental property owners hundreds of thousands over time. But they must remember that depreciation only applies to buildings, not land; maintenance costs like replacing an entire roof may qualify for depreciation; additionally if they sell their property before reaching its expected useful lifespan (27.5 years for residential properties and 39 for commercial), capital gains tax will apply on your profit.
So long as it meets certain requirements, depreciating rental properties can begin immediately – even without tenants in place. Deduct 3.636% of its cost basis over its expected useful life of 27.5 years each year to reduce your taxable income and save taxes in the process.