Guide to Calculating Depreciation on a Rental Property

Depreciation on a Rental Property

Purchasing and owning rental property has many benefits such as providing a stream of income and reaping high-interest profits when you sell rental properties. More importantly, it also lets you save money on your federal income taxes by taking depreciation. This is because the United States government gives you the benefit of the doubt by assuming that all of your assets lose value each year even if it actually doesn’t.

This is a major benefit when you own a rental property. However,  In order to maximize all the benefits you can have from Depreciation, you need to know and understand what it is and how it works. It may sound easy. Yet, when it comes to anything that has to do with Internal Revenue Service (IRS), it can get really get quite confusing and difficult. Don’t fret. Below is a simple guide to help you understand and calculate depreciation on your rental properties. 

Calculating depreciation

So, you’re probably wondering how do you begin to calculate depreciation? Depreciation lets you spread the tax benefit of your qualifying expenses of whatever improvement you’ve made in your everyday life. By filing taxes, your rent and expenses will be entered on a Schedule E form. Meanwhile, when you obtain a gain or loss then it gets brought over to form1040.

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Most expenses come from the single-year variety. For example, when you spend on snow removal or power washing on the property, it is considered a single-year expense. You then record the whole value of it one at a time. 

On the other hand, renovating your living room or placing new floors can be deemed as an expense that can be depreciated. Meaning, if your living room cost around $60,000 with an expected lifespan of 15 years, you can then get $4,000 annually for its expense.

Calculating depreciation is actually pretty simple as its only uses basic math techniques. To do this, first you take the value of your property and the divide the property`s value by the number of years according to its lifespan. The amount you get will be used as your expense annually to write off your taxes.

The biggest asset of a rental property is either the house, condo, or townhome. To get the depreciation on your rental property, it may be quite a challenge. First, you need to know what its value is. Then, you need to separate the value of the building from the value of the land. Home can be depreciated while the value of the land can`t. 

There are various ways to determine the value of your property. These include using an appraisal, a tax assessor’s report,  an insurance agent’s estimate to settle its value. The total amount may not all be the same but all of these are essential to determine your property’s value to use for depreciation.

The IRS has provided  27.5 years of useful life as a depreciation period for a residential property. Meaning if you have a property that costs around $200,000 you can write off  $7,272.72 per year as your expense. This is because anything that leads to a long-term value can be calculated for depreciation. For instance, Fixing a broken sink due to a clog is a kind of expense that must be deducted within the year compared to replacing the sink with a new one is considered a longer-term improvement that can be depreciated.

How It Works

The IRS has provided rules to follow for depreciation. It is essential to know and understand some of it. These includes:

• The property must be used for business as it can’t be deprecated when its used for personal use.
• You must be the owner of the property. Whether it’s a mortgage or not, the deed of the property must be in your name. 
• Your property must have a lifespan that’s determinable. 
• Furniture can’t be depreciated.
• An item that is being depreciated must only have an expected lifespan of only one year. 

You can also get depreciation on improvements made to your rental property during the year it is available for service. Also, you can continue to get depreciation even when your rental property is not active or idle.