One of the many financial benefits of investing in rental properties come 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 by virtue of the way it is calculated and applied. Nonetheless, failing to take a deduction for depreciation can provoke different unexpected and undesired troubles before long. As a result, it’s important for West Covina rental property owners to be aware of what depreciation is and why, surely, you should be deducting it on your taxes every year.
In connection with 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 predetermined that rental property owners should divide out those kinds of deductions over the useful life of the property. And so, essentially, 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 exceedingly cut down the amount of taxable rental income you can write on your tax return, certainly 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 other terms, available for use as a rental. Which means terrific news for property owners who sustain a vacancy swiftly after purchase or during renovations. How long you have to apply that depreciation hinges 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. Nonetheless, the most common one for residential rental properties is the Modified Accelerated Cost Recovery System (MACRS). Generally speaking, MACRS is laid up for several residential rental properties placed in service after 1986. In this approach, the disbursals of possessing and properly improving a rental property are spread out over 27.5 years, in effect what the IRS considers to be the “useful life” of a rental house.
To calculate how big your depreciation would need to be each year, you’ll be required to get your basis in the property or the amount you paid for it. You’ll perhaps be able to include some of your settlement fees, legal fees, title insurance, and other costs paid at the settlement. The toilsome component 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 may use property tax values to let you be aware of at what extent of the purchase price had to be allotted to the house, or your accountant might elect to use a standard percentage.
Then once you have the amount only for the rental house, you’re required to take one step further and figure out your adjusted basis. A basis in a rental property can thus be modified 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. Basis would, in addition, 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. Depending on your adjusted basis, you can easily 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. Although rental property tax laws can be complex and change quite a bit through the years. Consequently, it’s best to work with a qualified tax accountant to ensure that depreciation is actually being calculated and applied correctly.
When you work with Real Property Management Fairmate, we could help you partner up with accounting professionals who will support you through your depreciation questions and more. Retaining our experts can help property owners make sure that there are no unpleasant surprises all during the tax season. For more helpful information as to our West Covina property management services, contact us online or give us a call soonest you can at 626-691-9749.
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.