Rental Property Depreciation

Rental property depreciation is a tax deduction that allows you to claim the cost of a piece of rental real estate over a number of years. Generally, the amount you can deduct will depend on the type of rental property and how it’s used. This can be an important factor in making a decision to purchase and operate a rental property. You claim the deduction on IRS Schedule E Form 1040. You can start depreciating a rental property when it becomes ready to rent or goes into commercial use. The depreciation period ends when you fully recover the property’s cost or it is no longer rental, whichever happens first. You can also depreciate additions and improvements to a rental property with more than one year of useful life. This includes expenses such as the cost of hiring an architect to design a remodel and fees charged by a surveyor to locate utility lines.

How Does Rental Property Depreciation Work?

Generally, you can depreciate rental property as long as it has a determinable useful life and is used in your rental activity. You can also depreciate improvements made to rental property. However, some improvements aren’t eligible for depreciation. You can use either straight line or declining balance methods to depreciate rental property. You must choose the method that gives you the highest depreciation deduction. The recovery period for a piece of rental property depends on its property class and can be found in Appendix B or Table 2-1 of Pub. 946.

The recovery period of rental property begins when it is placed in service. If the property was used as your personal residence before being converted to a rental, you can continue to depreciate the property as a residential rental for 27.5 years. However, you must change the property’s depreciation method to MACRS if you place it in service after 1987.

The depreciation of rental properties can be affected by the alternative minimum tax (AMT). To avoid AMT, you should limit your depreciation to only the amount you can deduct on the AMT return. In addition, you should limit the amount of depreciation you claim for any property that is not eligible for the AMT. Generally, only the owner can depreciate property. However, if you’re a tenant-stockholder in a cooperative housing corporation that rents its units to others, you may be able to depreciate your share of the property.

How to Calculate Rental Property Depreciation?

To calculate the amount of depreciation, you will need to know your property’s cost basis and its value when it was purchased. The cost basis is your total purchase price for the property, including any closing costs such as lawyer fees and property taxes. The value of the property is its fair market value at the time it was purchased or the assessed value for real estate tax purposes.

In addition to the cost of the property, you can deduct any money you spend on improvements to the property. This includes any repairs that make the property more valuable or efficient and any work that restores it to its original condition or adapts it to a new use. However, it is important to note that routine maintenance is not deductible as an improvement.