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Depreciation De-Mystified: An Introduction to Rental Property Depreciation

Dollar Bill Origami of a HouseOne of the several financial benefits of investing in rental properties come at tax time 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 in view of the process by which it is calculated and applied. However, failing to take a deduction for depreciation can cause a few undesirable end results before you know it. Because of this, it’s significant for Belleview rental property owners to really get the point about what depreciation is and why, without a doubt, you should be deducting it on your taxes every year.

As 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 designated that rental property owners should appropriate those kinds of deductions over the useful life of the property. Wherefore fundamentally, rental property owners would be deducting a portion of their purchase and improvement costs (not operating or maintenance costs) each year for several years. This can greatly bring down the amount of taxable rental income you can record on your tax return, absolutely making depreciation worth the time it takes to calculate.

A property owner will begin taking depreciation deductions as soon as the rental property is placed in service, or in essence, ready to be rented out. This is really welcome news for property owners who have a vacancy right after the final purchase or during renovations. How long you can take that depreciation is contingent both on 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. Moreover, the most common one for residential rental properties is the Modified Accelerated Cost Recovery System (MACRS). Commonly, MACRS is used for various residential rental properties placed in service after 1986. In this process, the financial upkeep of investing in and upgrading a rental property is spread out over 27.5 years, especially what the IRS considers to be the “useful life” of a rental house.

To find out exactly how much of your depreciation has to be each year, you’ll have to determine your basis in the property or the amount you paid for it. You could likewise be able to include some of your settlement fees, legal fees, title insurance, and other costs paid at the settlement. The difficult thing about this number is that you’ll be required 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. Most commonly, you are allowed to use property tax values to help you find out just how much of the purchase price needs to be allocated to the house, or your accountant might elect to use a standard percentage.

Then when you do have a total precisely for the rental house, you’ll have to make one more step and figure out your adjusted basis. A basis in a rental property can possibly be an added account for things like major improvements or additions, money spent restoring extensive damage, or the cost of connecting the property to the local utility service providers. Basis shall furthermore decrease in the event of insurance payments you received to cover theft or damage and any casualty losses you took a deduction for that were not covered by your insurance. With the use of your adjusted basis, you should be able to now calculate the amount of deprecation 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. Nonetheless, rental property tax laws can be complex and change quite a bit later on. Thus, it’s best to work with a qualified tax accountant to ensure that depreciation is, in actuality, being calculated and applied correctly.

When you recruit Real Property Management Diversified, we can help team you up with accounting professionals who can surely facilitate you along the whole process with your depreciation questions and more. Recruiting our experts can help property owners make sure that there are no unpleasant surprises the whole duration of the tax period. For further inquiries in relation to our Belleview property management services, contact us online or give us a call shortly at 352-854-2221.

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