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Depreciation De-Mystified: An Introduction to Rental Property Depreciation

Dollar Bill Origami of a HouseOne financial benefit of investing in rental properties come at tax time is when investors get to deduct not only operating expenses, property taxes, and so on, but also depreciation. This key tax deduction works differently from the others resulting from the approach by which it is calculated and applied. Notwithstanding, failing to take a deduction for depreciation can create particular unwelcome results. That is why it’s important for South Jordan rental property owners to truly know what depreciation is and why, in fact, you should be deducting it on your taxes every year.

In regards to buying and improving rental properties, depreciation is the process used to deduct any associated costs. Rather than take one large deduction in the year the property was purchased or improved, the IRS has prescribed that rental property owners should stretch out those kinds of deductions over the useful life of the property. Accordingly, rental property owners should be deducting a portion of their purchase and improvement costs (not operating or maintenance costs) each year for several years. This can lower the total taxable rental income you report on your tax return, thereby making depreciation worth the time it takes to calculate.

A property owner could begin taking depreciation deductions as soon as the rental property is placed in service, or in short, operational as a rental. This a really good thing for property owners who undergo a vacancy right after buy out or during renovations. Just how long you keep taking that depreciation is contingent both on exactly how long you own and use the property as a rental, and which depreciation method you use.

There are different depreciation methods that determine the amount you can deduct each year. Yet the most common one for residential rental properties is the Modified Accelerated Cost Recovery System (MACRS). As a whole, MACRS is put to use for whenever a residential rental property placed in service after 1986. In this operation, the disbursements of getting and greatly improving a rental property are spread out over 27.5 years, precisely what the IRS considers to be the “useful life” of a rental house.

To establish to what extent your depreciation would have to be each year, you’ll have to determine your basis in the property or the amount you paid for it. You might additionally be able to include some of your settlement fees, legal fees, title insurance, and other costs paid at the settlement. The laborious part of this number is that you’ll have to separate the cost of the land from the building since only the rental house itself – and not the land it is built on – can be depreciated. In most instances, you shall use property tax values to enable you to consider how much of the purchase price is supposed to be entrusted to the house, or your accountant might elect to use a standard percentage.

When you have a valid figure for the rental house, you’ll have to progress one step forward and figure out your adjusted basis. A basis in a rental property would be revised to account for things like major improvements or additions, money spent restoring extensive damage, or the cost of connecting the property to local utility service providers. The basis may similarly decrease in the event of insurance payments you received to cover theft or damage and any casualty losses you took a deduction for already that were not covered by your insurance. Applying your adjusted basis, you, indeed, may now calculate the amount of depreciation you can deduct on your income tax return.

Depreciation of a rental property is a valuable tool for investors looking to reduce their annual tax obligation. Moreover, rental property tax laws can be complex and change quite a bit through time. That’s why it’s best to work with a qualified tax accountant to ensure that depreciation is actually being calculated and applied correctly.

When you retain Real Property Management Wasatch, we can assist you in establishing links with accounting professionals who can perhaps enable and help you through depreciation questions and more. Contracting with our experts can help property owners make sure that there are no unpleasant surprises all throughout tax time. For more details regarding our South Jordan property management services, contact us online or give us a call outright at 801-418-9835.

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