When you invest in rental property, you’re well-advised to hire a reliable provider of real estate tax services. You will appreciate said services considering the complicated rules and regulations of the Internal Revenue Service (IRS), the county tax assessor’s and tax commissioner’s offices, and other agencies.
Among the more complicated matters is rental property depreciation. While most rental property expenses, such as repair and maintenance, travel expenses, and professional services, are relatively easy to determine, this isn’t so for rental property depreciation. Here’s what you need to know.
Definition of Depreciation
In accounting, depreciation is the method used in cost allocation of a tangible asset over the span of its useful life. For this reason, the tangible asset (e.g., buildings) reduces in value due to normal wear and tear, although it can also be reduced in value to nearly zero before its expected lifetime has come to an end due to obsolescence. In case of rental property, the buildings are depreciated for tax purposes.
Depreciable Property
Bear in mind that the IRS has specific rules about depreciation on rental property – or any real property for that matter. This is where your reliable provider of real estate tax services comes in. Nonetheless, keep these things in mind about which property can be depreciated and when to start and end with depreciation.
First, according to the IRS, a rental property can be depreciated if and when it meets the following criteria (i.e., all of these requirements should be met):
- You are the rightful and legal owner of the property even when it’s subject to debt.
- You are using the property in business or in income production.
- The real property has a useful life that can be determined in years or months. This means it should decay, wear out, be used up, loses its value due to natural causes, or becomes obsolete from manmade or natural causes.
- The real property should last for more than a year.
Emphasis must be made on two things:
- The real property cannot be subject to depreciation when it was placed in service but it was either no longer used for business purposes or disposed of within the same year.
- The land on which the building sits on cannot be depreciated because it doesn’t wear out, decay, get used up, or become obsolete. Even the costs of developing the land, such as clearing, cultivating plants, and landscaping, cannot be depreciated since these are considered as costs of the land.
Getting the right computation on depreciation on rental property is important since it’s considered a business expense. Your associated taxes on real property can be reduced for this reason.
A few more things about depreciation:
- Depreciation deductions can be made as soon as the real property is ready and available for rent (i.e., placed in service).
- Depreciation can be recognized until either of these things happen: 1. The entire cost of the property has been deducted; or 2. The property is retired from service even when the entire cost has yet to be recovered.
When it comes to estimating the value of income generating properties, depreciation is not an allowable expense. It is considered an accounting expense and not an operating expense. So although the IRS recognizes this as an expense, the tax assessor doesn’t.
Conclusion
You should discuss matters of depreciation with your chosen provider of real estate tax services because these have an impact on your bottom line. You should do so on a regular basis as the rules and regulations can change.
