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What is Rental Property Depreciation and How Can it Benefit You?

While there are many other benefits of owning property, be sure to read up on the tax benefits of property depreciation.

What Is Rental Property Depreciation?

Understanding rental property depreciation is important and helpful for landlords seeking to recover some of the costs associated with owning income-producing property.

Rental property depreciation refers to the reduction in the value of a property due to natural wear and tear or property damage. When monitored properly, landlords may be able to deduct the expenses related to such depreciation from their taxable income for the year.

In this article, we will outline how to properly track and calculate rental property depreciation to help enable property owners to take advantage of its cost-saving potential.

Rental Property Depreciation in Action

Per the Internal Revenue Service (IRS), landlords may begin to depreciate their property once it has been made available to tenants for rent. For instance, if a property is listed for rent on February 1st, but a tenant does not move in until the middle of March, depreciation would still begin in February.

Once a landlord has fully recovered their costs, or the property is no longer a rental, depreciation ends. That said, rental property depreciation may continue even if there is no tenant actively occupying the space in certain cases, such as during repairs or a new tenant search.

What Qualifies a Rental Property for Depreciation?

Consulting with a tax professional to determine if a property qualifies for rental property depreciation is the best course of action, but in general, the IRS sets the following requirements for rental property depreciation:

  • Ownership of the property
  • The property must be used to generate income
  • The owner must be able to determine the useful life of the property beyond one year

Calculating Rental Property Depreciation

Calculating depreciation for a rental property requires knowing the cost basis of the property, the recovery period, and the recommended depreciation method. 

  1. Find the cost basis of the property – This is the total acquisition cost (including mortgage, legal fees, transfer taxes, and title insurance) less the value of the land underlying the property
  2. Separate land and building costs – Landlords may only depreciate the cost of a building not including the land. As such, they should refer to the fair market values to find the individual cost of the building in question
  3. Property Depreciation Calculator – A depreciation calculator will determine the aforementioned, cost basis, recovery period, and ultimately, the cost of depreciation on the property

The property owner may then submit their depreciation figure to a tax professional to discuss the potential for a deduction. However, the best practice would be to use a tax professional from the start to assist with the calculation and ensure its accuracy.

How Much Will Depreciation Reduce Tax Liability?

As with all tax calculations, the potential for a reduction in liability from rental property depreciation will depend on several factors, including tax bracket and amount of depreciation. 

Property owners weighing the benefits of submitting their rental property depreciation should meet with a trusted tax specialist to better assess their particular circumstances and prospective payoff.